Need a Personal Loan To Pay Off Credit Cards? What To Know

No one likes debt, but sometimes it’s necessary to use a credit card to cover an expense. If you do have credit cards, you’re not alone, either; 82% of adults in the U.S. have at least one credit card, with total balances exceeding $1 trillion as of the summer of 2023, according to the Government Accountability Office.

While credit cards may be a necessary convenience, they can also get expensive fast. Fortunately, you may be able to use a personal loan to pay off your credit card debt, and ideally net yourself a lower interest rate, which can put you on the fast track to paying down your debt.

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Understanding credit card debt

Before paying off your credit card debt, it’s important to consider the following:

• Total amount owed: To consolidate credit card debt with a personal loan, you’ll need to know how much you owe. Add up the balances (if you have multiple cards) to find the total. Personal loan lenders may offer loan amounts from $1,000 to $100,000 or more, depending on your credit profile and income.
• Interest rates: Credit cards can be difficult to pay off if you’re only making the minimum payment — both because APRs tend to be higher than on personal loans, and credit card interest compounds if you don’t pay off the interest every month. The average APR for a credit card was 21.51%, according to the Federal Reserve, while a 2-year personal loan was 11.92%. The appeal of using a personal loan to pay off a credit card is often a lower interest rate, a fixed monthly payment with a defined payoff date, and no compounding interest.
• Minimum payments: Add up the total of your minimum payments. You may be able to get a personal loan with an equal or lower monthly payment, especially if you’re willing to pay it off over several years.

The cost of credit card debt

Suppose you have three credit cards totaling $5,500, each with monthly payments adding up to $125 overall and APRs ranging from 21% to 29%. If you only made the minimum payment, you would pay $59,038.10 in total interest and pay off your debt in more than 30 years.

Here’s how a personal loan can consolidate your balances and help you pay off your debt quicker.

Let’s say you take out a $5,500 personal loan that you use to pay off the credit cards above. If it has a seven-year repayment term and a 15% APR, you'd have a $106 monthly payment. Your payment would be lower and, over the span of the loan, you'd only pay $3,415 in interest — which translates to thousands of dollars of savings.

Loan Amounts:

• $2,000 Loan
• $5,000 Loan
• $10,000 Loan
• $40,000 Loan
• $45,000 Loan

Ways to pay off credit card debt

Credit card debt can be paid off in a number of ways, including with a personal loan.

Personal loans

A personal loan is disbursed in one lump sum payment and paid off in monthly installments with a fixed rate and set term. Unlike a credit card, you’ll know exactly when your debt will be paid off. You can get a personal loan from an online lender, bank or credit union. Some lenders offer loan amounts up to $100,000 or more, though most top out at $50,000 if you can qualify. Common repayment terms for personal loans are one to seven years.

Personal loans can be secured or unsecured. With a secured loan, you provide collateral like a bank account or other asset. Secured loans can be great options if you have bad credit, but if you default, the lender can seize your collateral. Unsecured loans don’t require collateral, but you may have a higher APR since the lender is taking on more risk.

Before applying, prequalify with multiple lenders to see rates and terms you might qualify for. Prequalification won’t impact your credit, but when you apply, the lender will perform a hard credit check that will affect it. Prequalification is not an offer of credit, and your final rate may differ.

Learn More: How To Use a Personal Loan To Pay Off Debt

Balance transfer credit cards

Some balance transfer credit cards have a 0% APR introductory offer that’s designed to help you pay off a balance from another card. The introductory period generally ranges from six to 24 months or more, depending on the credit card issuer. There is typically a fee to transfer the balance, which may be 3% to 5% of the amount transferred.

Be careful. Once the promotional period expires, the standard APR will resume on any remaining balance. The best strategy is to calculate how much you’ll need to pay monthly to pay off the entire transferred balance (plus the balance transfer fee) within the promotional period. Set aside a certain amount for each payment per month until the introductory offer ends.

Learn More: Debt Consolidation vs. Balance Transfer

Home equity loan or a HELOC

Home equity loans are often referred to as a second mortgage, since you’re using the equity in your home for a loan. They use your house as collateral, so if you default, the lender can seize it.

These loans work similarly to a personal loan; you’ll receive a lump sum and make monthly installments at a fixed rate and term. Repayment terms typically range from five to 30 years, depending on the lender. Home equity loans tend to have lower APRs than credit cards, with rates slightly higher than mortgage rates.

You might also consider a home equity line of credit (HELOC). This lets you borrow from the equity in your home, but is a revolving account that allows you to draw as much as you need up to a certain limit, typically while making minimum payments. Once the draw period is over, you’ll enter the repayment period, where you’ll make more comprehensive regular monthly payments.

For both options, most lenders require that you have a loan-to-value ratio (LTV) of 85% or less. For example, if your home is valued at $400,000 (“value”) and you have a $250,000 mortgage (“loan”), your LTV would be 62.5%. You may be able to borrow up to $90,000 with a home equity loan (which would put you at an 85% LTV), depending on the lender.

Learn More: 

• Home Equity Loan vs. Personal Loan
• Home Equity Line of Credit vs. Personal Loan

Comparison of interest rates, terms, and potential fees

The following table compares various factors for a personal loan, balance transfer credit card, and home equity financing options.

Factors to consider when choosing a loan

Most loans are not equal. When comparing with multiple lenders, you’ll want to consider the following:

• APR: Don’t rely on the interest rate alone when comparing lenders. The APR more fully reflects the cost of borrowing, and includes the interest rate and upfront fees.
• Loan amount: The right loan depends on the amount a lender can offer you, based on your credit score and income. Loan amounts for personal loans can range from less than $1,000 to $100,000 or more. Home equity loans will be limited by the value of your home relative to your current mortgage — you may be able to borrow up to 85% of your home’s value, all loans against it considered.
• Repayment term: Different lenders have varying repayment terms, but most unsecured personal loans range from one to seven years. Home equity loans range from five to 30 years. While having a longer term means a lower monthly payment, you’ll typically pay more in interest over the life of the loan.
• Time to fund: How soon you need your funds can be a crucial factor. Most personal loan lenders can fund as soon as the same or next business day, while home equity loans could take a month or more to close.
• Fees: Charges and other fees can add to your loan’s cost. Upfront fees are accounted for in the APR, but late fees, for example, are not. Some personal loans have origination fees of 1% to 12%, while home equity loans usually have closing costs from 2% to 5%.
• Credit score requirements: Lenders typically require you to have a good to excellent credit score to qualify for a loan, but there are some lenders that specialize in bad-credit loans.
• Lender reputation: Before applying with any lender, read customer reviews and check out its reputation online. You can start at websites such as Trustpilot and the Better Business Bureau.

Learn More: Average Personal Loan Rates

Loan alternatives

You may want to consider alternatives to using a loan to pay off credit card debt:

• Debt snowball and avalanche methods: These methods focus on different ways to pay down your debt effectively. Using the snowball method, you prioritize paying down your smallest debts first — while making minimum payments on the rest — and apply each payment to the next debt once it's paid off (like a snowball) until all the debt is paid off. This method is best for those who want to see quick progress. With the avalanche method, you focus on high-interest debt by paying more toward those balances first.
• Seek professional financial advice: A credit counseling agency can help you pay down debt by creating a debt management plan. A credit counselor meets with you to go over your financial profile, set up the plan, and negotiate with your creditors for a lower interest rate or waived fees. These plans can come with monthly or set-up fees, depending on the agency, and you may be required to close the accounts you’re paying off.
• Negotiate with creditors: Some creditors may be willing to waive fees or lower your interest rate if you attempt negotiations yourself.
• Increase your income or cut expenses: Look for additional sources of income, ask for a raise, or seek a new job that pays more. You may also consider cutting discretionary expenses (like subscriptions and eating out).

Learn More: Personal Loan Alternatives

Tips for managing debt responsibly

Consolidating your credit card debt is a great first step toward paying down your debt. But it's important to also make sure your financial habits will prevent more credit card debt piling up in the future. If you find yourself struggling to manage your finances, here are some tips to manage your debt responsibly:

• Create a budget and stick to it: A budget can help you manage your finances and potentially save for emergencies. Make a list of your expenses each month, and subtract that from your take-home pay. Whatever is left over can either be sorted into your savings or put aside for something extra. There are also budgeting apps you can try that come with varying features. Some are paid, like YNAB, or offer a free plan, like EveryDollar. By creating a budget and sticking to it, you can get some insight into your financial habits.
• Prioritize high-interest debt: You can save the most money by focusing on paying down your high-interest debt. A balance transfer credit card can be an effective method of paying off that debt, but you’ll have to pay it off before the end of the 0% APR promotional period. The debt avalanche method may be one of the best ways to whittle down your high-interest debt, but it can take a while to see any progress. However, you can save more on interest by paying it off and avoiding balance transfer fees.
• Build an emergency fund: An emergency fund is crucial to have in the event of a job loss or unexpected medical bills. You don’t want to use a credit card and potentially get into more debt. If you create a budget, set aside savings each month once you’ve determined how much you want to save. Generally, you should have 3 to 6 months of savings to cover you in case of an emergency.

Related Articles:

• What Is Credit Card Consolidation?
• Pay Off $10K in Credit Card Debt
• Pay Off $30K in Credit Card Debt
• Debt Consolidation Loan Rates
• Credit Card Refinancing vs. Debt Consolidation
• Debt Consolidation Loan for Bad Credit
• How Debt Consolidation Helps Your Credit