Using a Personal Loan to Pay Off Debt
Is using a personal loan to pay off debt a good idea? In many cases, it can be. Many of our clients have used this strategy to reduce their monthly repayments and cut their interest fees. But obtaining a loan to pay off credit cards isn’t suitable for everyone. Let’s take a look at when you should think about getting a loan to pay off credit cards.
Personal Loan vs. Credit Card
There are differences between personal loans and credit cards. This is why it’s important to know your finances before taking a personal loan to pay off credit card
Personal loans are an installment debt, which means you pay off a fixed amount every month for a fixed period. Credit cards are a revolving debt, so the monthly repayments change because you can continually borrow more as you pay off your debt.
Credit cards are also catered to smaller spending amounts, whereas the average personal loan has a minimum loan amount of $1,000-$5,000. There are also additional fees to consider. Many personal loans come with origination fees of 5-6%.
When Should You Use a Personal Loan to Pay Off Debt?
Should I get a loan to pay off credit cards? It depends on your circumstances. First, due to the minimum loan amounts on most personal loans, if your debts aren’t within the $1,000-$5,000, it’s usually not worth it. If your debt is within this range, here are some reasons why taking out a loan to pay off credit card debt can be a good option:
- Lower Interest Rates – The average personal loan has a lower interest rate than the average credit card. A personal debt consolidation loan can stop you from being swallowed by high interest rates.
- Lower Monthly Repayments – Credit card repayments hinge on how much you owe. Personal loans are spread out over a fixed period with a fixed repayment. You might find using personal loans to pay off debt yields a lower monthly repayment.
- Streamlined Repayments – Do you have multiple debts? Consolidating your debts into one easily repayable loan can make your finances easier to handle.
- Improve Your Credit Score – Your credit score takes a hit when you use more than 30% of your cards’ total balance. Getting a loan to pay off debt can take you under this limit. Another reason to get a loan to pay off debt is to improve your credit mix, which counts for 10% of your overall score.
When You Shouldn’t Use a Personal Loan to Pay Off Debt
Getting a personal loan on credit card debt isn’t always the best option. If the following circumstances apply to you, we don’t recommend using a personal loan to pay off credit cards.
- Debts Lower than $1,000 – Most personal loans have a minimum loan amount of $1000-$5000. If your debts are smaller, it’s not worth taking out a personal loan to pay off debt because you’ll have a higher overall balance.
- Your Debt is Out of Control – If you don’t see yourself being able to repay your debts within the next five years, it’s time to contact a professional. Taking out more debt when you’ve lost control only digs a deeper hole.
- Your Credit Score is Low – The main advantage of getting a loan to pay off credit cards is lower interest rates. If you have a low credit score, chances are a personal loan is merely a lateral move.
Alternatives to Debt Consolidation
Using a personal loan to eliminate debt is an excellent way of paying off credit cards, assuming you can get approved for one. However, if debt consolidation isn’t for you, there are alternatives to debt consolidation. Let’s take a look at some of the other options available to you:
- Visit a Credit Counselor – Credit counselors don’t just show you where you can improve. They work with you to put together debt management plans which they present to your creditors. This can net you not only an education but also some breathing space.
- Debt Settlement – Entering debt settlement means negotiating with your creditors to accept one reduced payment to eliminate your debts. This is ideal if your current level of debt is unsustainable. The problem is your creditors don’t have to agree.
Getting a loan to pay off credit cards can work for people with moderate levels of debt. Consolidating your debts and paying reduced interest can help you meet your obligations. If you need help obtaining a personal online loan, or advice on whether it’s the right option for you, contact Tower Loan and talk to one of our financial experts.