How to Use Installment Loans to Pay Off Credit Cards
Taking steps to manage credit card debt can improve your credit score as well as reduce financial stress and uncertainty. One lucrative path to consider when paying off credit cards is consolidating credit card debt into a personal installment loan. Here’s a closer look at the advantages and disadvantages of taking out an installment loan to pay off credit cards.
How Installment Loans Work
Installment loans are a type of personal loan. Individuals are expected to pay off this loan amount in fixed increments over a set period.
Where to get a loan to pay off credit cards? They can be issued by online lenders, banks, or credit unions. A lender may take credit scores, credit history, income, and debt into account to determine loan eligibility and the interest rate attached. For example, if you have a higher credit score, you will be charged less interest. Whereas, a lower credit score can lead to a higher interest rate.
Benefits of Installment Loans
Have you ever considered “Should I take a personal loan to pay off credit cards?” If so, here is a tip to help you decide. Calculate your monthly credit card based upon the principal amount due in addition to the nominal interest rate.
Often, the minimum monthly credit card payments are small, making them relatively affordable. However, these payments may barely cut into the outstanding balance, especially when the average interest rate and APR can exceed 17% for new offers. The longer the balance is in place, the more interest is accrued. This leads to a longer payment process and lower credit score in the interim.
Typically, individuals save money by taking out a personal loan for a credit card because the payment term is shorter. Personal installment loans are generally set at one or five years with higher monthly payments. Consolidating debt into single monthly payments is convenient, as there is one date and amount to pay per month. Also, installment loans are usually set at a fixed rate. These fixed payments are often much lower than credit cards whose rates vary based on credit card agreements.
Installment Loan Drawbacks
While there are significant advantages to applying for an installment loan to pay off credit cards, there are considerations to take into account. As mentioned, depending on your credit score, credit history, income, and debt, you may not qualify for a personal loan. These factors also determine how the loan’s interest rate is set, although it’s often still more reasonable than credit card rates.
Also, loan payments are typically higher than minimum monthly credit card payments. Therefore, the payment period is shorter. However, if you’re struggling to make minimum credit card payments, it’s not ideal to take out a loan with higher payments. In this case, it may be best to seek alternate means.
Alternative Debt Repayment Options
While getting a personal loan to pay off credit cards is an excellent repayment plan, there are options such as the debt snowball and the debt avalanche methods.
The debt snowball repayment option prioritizes debt by the lowest balance. First, you eliminate the smallest debt by paying just over the monthly payment. Once that debt is paid off, you move onto the next debt with the smallest amount owed. The payment from the original debt is now combined with that of the second. That total is applied to the second debt until it is paid completely off. This practice continues until your debt is paid in full.
Conversely, the debt avalanche approach prioritizes debt with the highest interest rate. Eventually, the individual continues to pay off each debt one-by-one, working their way down to the debt with the lowest rate.
Besides avoiding a loan altogether, both approaches have their own advantages. They each have disadvantages as well. However, if you need help deciding which is best for you, contact us.
Can You Pay Off a Loan with a Credit Card?
On the flip side, can you pay a personal loan with a credit card? The answer to this is yes…but it depends on the lender and the type of loan owed.
Each lender has its own policy and regulations regarding how debt can be repaid. Some allow the use of credit cards, while others forbid it. For example, federal student loans have Department of Treasury-backed restrictions for accepting credit cards as a form of payment.
Our team at Tower Loan suggests contacting your lender. But, before you ask them, “can I pay a loan with a credit card?” review your credit card’s interest rates and repayment period. If you feel the repayment is feasible, speak to your credit card provider about how to move forward.
Many credit card companies allow holders to make loan payments through their online accounts as a balance transfer. Others, however, require individuals to request credit card convenience checks.
Apply for an Installment Loan through Tower Loan
Depending on your financial circumstances and the reason for the loan, taking out an installment loan to pay off credit cards may be the best option for you. Tower Loan’s application process is straightforward. Our specialists assess the best personal loans to pay off credit cards based on your needs. If you are interested in applying for an online loan, please contact one of our representatives today.