Using a Personal Loan to Pay Off Debt Is a Great Idea

Last Updated: July 16, 2017

We have a lot of articles on our site offering advice on how to pay off your debts and become debt-free. We know that finding yourself over your head in debt eventually leads you down the road of missed payments, repossessions, and foreclosures - not to mention the endless phone calls and letters from collection agencies. The three basic steps to paying off your debts are to stop accumulating more debt, pay off high interest loans first, and put as much money as you can toward paying down your outstanding balances.

Getting out of debt, particularly consumer debt, is the cornerstone of financial freedom. It frees up cash for saving and investing. It enables us to get off the treadmill of living month-to-month. And being debt-free just feels great and we have a great way to help you pay off your debt - personal loans.

Tips When Using a Personal Loan to Pay Off Debt

Using a personal loan as a debt payoff tool is often overlooked and it may seem odd to use new debt to get out of old debt. OK, yes, there are some risks to this approach, but if used correctly personal loans can lower your interest payments and shorten the time it takes to become debt-free. Here are some tips when considering using a personal loan to pay off your outstanding debt.

1) Check the Interest Rate. Refinancing your debt at a lower interest rate is like hitting the lottery. A lower interest rate reduces the amount of interest paid and, assuming the term of the loan is the same, also reduces the monthly minimum payment. Refinancing existing debt with a lower-rate personal loan is a smart way to accelerate debt repayment. If you are able, try consolidating all of your high interest rate debt into one lump sum loan at a lower interest rate - this not only lessens the amount you will be paying in interest but it gives you just one payment to make each month. And, having one monthly payment can help when planning your budget and it prevents payments from being forgotten or missed.

2) Check the Term of the Loan. Care and planning must be taken to make sure the term of a personal loan is consistent with your budget and financial goals. If a personal loan has a shorter term than the existing debt, your monthly payments may be more than your budget and/or income can support. On the flip side, extending the term of a loan can result in more interest paid over time. Both of these factors need to be carefully considered when you are thinking about taking out a personal loan to pay off existing debt.

3) Does the Loan Need Collateral. Typically, personal loans are a type of unsecured debt. However, there are some instances where lower interest rates can be obtained through secured loans, such as a home equity line of credit. While this is a reasonable option in some cases, it’s important to understand that failure to pay a home equity line of credit could result in the foreclosure of your home.

4) Weigh the Benefits of Consolidation. We touched on briefly the notion of consolidating your debts but the key to using personal loans as a tool to getting out of debt is achieving lower interest rates (as noted above). While this can include consolidating multiple debts into a single new loan, consolidation by itself is not beneficial. It may reduce the number of monthly payments that must be made, but if the new loan comes with a higher interest rate, the added convenience may not be worth the cost. So, if you are thinking about combining all of your debts, make sure the interest rate of the personal loan is lower than the rate of all of your other debts.

Bottom line, if you are looking for a way to pay off your debts, consider using a personal loan. But before you apply for a personal loan, it helps if you know where you stand, credit-wise, so you can look for the best rates within your credit range. Just like getting a credit card, when it comes to getting a personal loan, having a higher credit score will get you access to lower interest rates. Make sure you shop around for the best rate because if you are not lowering your overall interest rate, there is no point in going down this road in the first place.

8 Pros and Cons of Using Personal Loans to Consolidate Credit Card Debt

Using personal loan to pay off credit card

Money Girl explains the pros and cons of using personal loans to consolidate or pay off credit card debt. You’ll find out the best places to apply for a personal loan and how consolidating affects your credit.

Using personal loan to pay off credit cardAbout one half of all American households are carrying credit card debt, with an average balance above $15,000. If you’re one of them, you’re probably paying way too much interest for your debt than you should.

In this episode, I’ll tell you the pros and cons of using personal loans to consolidate or pay off credit card debt. You’ll find out the best places to apply for a personal loan and how consolidating affects your credit score.

A personal loan is money you borrow to pay for just about anything, such as your wedding, a dream vacation, a new computer, medical bills, or to consolidate other debts.

There are two main types of personal loans: secured and unsecured.

  • With a secured personal loan, you’re required to pledge collateral, such as a car or house, to back up the loan in case you don’t make payments.
  • With an unsecured personal loan, which is much more common, you don’t need to put up any collateral. Unsecured loans are also known as consumer or signature loans.

You can get a personal loan at most banks, credit unions, and a variety of online lending companies. The amount you can borrow depends on the lender, your credit, and your income.

Personal unsecured loan amounts usually range from $2,000 to $35,000 and have a fixed interest rate. If you want to borrow more, you typically have to apply for a secured loan.

Personal loans come with a choice of repayment terms that may range from 3 to 10 years. If you want to pay off your personal loan ahead of schedule, most don’t charge you a prepayment penalty.

However, most personal loans come with an origination fee that could range from 1% to 10% of the loan amount. This is a one-time fee deducted from your loan proceeds.

You may see an initial interest rate when you apply, but a higher rate when you’re quoted. This is because the fee must be included in the annual percentage rate (APR) for the loan you choose.

That means one lender that seems to have a lower APR may actually be more expensive if they charge a higher origination fee than another lender. So, do your homework by shopping and comparing interest rates with multiple lenders.

6 Proven tips to PAY OFF your credit card debt in India

1,90,000 crore was spent using credit cards in India in the year 2015. Over the last decade the usage of cards has increased many folds and while that’s great for economy, it also means more and more people getting into credit card debt as many people are now dealing with credit cards.

In the graph below which was published by Livemint, it shows the growth in the card usage in our country

Using personal loan to pay off credit card

How investors get into Credit Card Debt Trap?

Credit cards if not used properly can get you into debt trap very easily. We get several emails and comments regarding how to handle credit card debt. Below is one of the comments

I have a SBI card in which I have an outstanding balance of Rs 100000 so I went for settlement and they offered me a settlement amount of Rs.78000. Can it get it still reduced? Because I am not in a position to pay this amount.

A lot of investors who do not use credit card in a wise manner end with a large outstanding on their cards and finally have to go for credit card debt settlement which lowers their credit score and puts a black mark on their credit report, and this inturns hampers their chances of getting loans in future.

In this article I am going to share some of the options which one can explore. If you want to quickly look over those 6 points, you can just watch the video below

Note that these points to be looked in order. I mean first you see if option 1 is applicable to you or not. If not, then you move to option 2, if it still does not help you then you move to other option.

Option #1 – Break your investments and pay the bill

There are many people who keep rolling their credit card debt, and at the same time have money in their bank account or a fixed deposit. It does not just strike them that they can just pay off the full outstanding by breaking their FD or cash in account.

This happens out of ignorance most of the times.

So if you can restructure your money here and there and can pay off the credit card debt, it’s the best option.

Option #2 – Pay off the credit card debt in 5-6 payments

If option #1 is not feasible for you, then the next best option is to pay off the debt in 5-6 parts. Most of the people get too attached to the minimum balance amount and then they just stick to it because that’s the minimum required to be paid to save the penalty. But then the interest is anyways to be paid, which makes sure you never get out of the debt.

So go beyond the minimum balance amount and pay 3-4X of the minimum balance each month. For example, if your credit card debt is Rs 2 lacs and the minimum due amount which can be paid is Rs 10,000 . Then try to pay 2-3X of that amount, which is Rs 30,000 or Rs 40,000 per month. If not that much, then at least 20,000. That way at least you will pay off the entire debt in next 1 yr if you are disciplined enough.

Using personal loan to pay off credit card

Option #3 – Take loan from friends/family and pay off the credit card outstanding amount

The 3rd option is to try to get some loan from friends or family members and pay off the credit card debt in one go and then pay back the person later as per what you agreed with him/her. One can often get interest free loan from a close friend or a sibling if you communicate your problem well. Make sure you pay them back exactly within the time frame mentioned.

Most of the people have burned their fingers by giving money to their friends and relatives because it gets very tough to ask back the money and it can bring sourness in the relations due to money matters.

So you can also choose to pay some interest because the person can anyways earn some money from FD, so better offer to pay 10% interest per year. It’s a win win situation if it works out !

Option #4 – Take personal loan to pay off credit card debt

If you don’t get loan from someone close in family/friends, then you can go for a personal loan and use that money to pay off the card outstanding. Interest will be in range of 14-18%, but still it’s better than paying 40% on yearly basis.

This does not clear your debt, but just shifts your debt from credit card to a personal loan. Much better option. For those who already have a home loan going on, they can also look at the top up loan facility which will be much cheaper to a personal loan.

Option #5 – Convert your credit card loan to EMI

If you are not getting personal loan, then you can convert your debt to EMI option from the same lender. Almost all the big banks give an option to convert the credit card debt to EMI for tenures like 3/6/9/12/24 months. The interest can range between 13-18% depending on the lender.

Using personal loan to pay off credit card

Option #6 – Use Credit Card Balance transfer facility

There is a facility called Balance Transfer provided by many credit card companies, where you can switch your current credit card outstanding to a totally new credit card. In this case, the new credit card will pay off your old credit card and will also offer you some benefits like interest free period of 3 months or low interest for first few months.

Using personal loan to pay off credit card

Almost all the major credit card companies like SBI credit card, ICICI credit card and HSBC have this credit card balance transfer facility service with them. SBI credit cards even provide 0% interest for next 60 days. However, before opting for this option, please check if there is any processing charge or not? It might happen that the lender is providing free interest period, but then high processing fees will nullify the advantage

However, note that this is a temporary solution for next 2-3 months and by that time you should look for further solutions.

Below are some high level points which will save you from getting to credit card debt

  • Pay your Credit Card 3 days before due date, keep a reminder on phone if it helps
  • Don’t spend much more than you can afford.
  • Carry debit card instead of credit card, You will pay only what you have
  • Don’t keep very high credit limit, if you can’t control yourself when it comes to spending

Please share if you have any more solutions?

Can you use a student loan to pay off credit cards?

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Should you use extra student loan money to pay off credit cards?

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Using personal loan to pay off credit card

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Using personal loan to pay off credit card

Can student loan money be used to pay off your parents' high interest not-education-associated credit card debts?

Using personal loan to pay off credit card

Is there a particular formula used to determine when it is financially beneficial to pay off a home equity loan of 8.25 using a credit card of 3.99?

Using personal loan to pay off credit card

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Can you use your Stafford student loan to pay off debt?

Using personal loan to pay off credit card

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Using personal loan to pay off credit card

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Using personal loan to pay off credit card

Can you use your student loans to pay your credit card off if you are unable to work while in school?

Can you use a credit card to pay off a student loan?

If you settle a student loan for a compromised pay off does that hurt your credit score?

Pay a personal loan off with a credit card?

Using personal loan to pay off credit card

Can you a loan through citi financial to pay off a citibank credit card?

Using personal loan to pay off credit card

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Using personal loan to pay off credit card

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Using personal loan to pay off credit card

Does taking a loan on land to pay off credit card debt make sense?

Can you use your credit card to pay your monthly car loan?

Using personal loan to pay off credit card

Should you get a loan to pay off credit cards using your car as collateral?

Using personal loan to pay off credit card

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Using personal loan to pay off credit card

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Using personal loan to pay off credit card

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Using personal loan to pay off credit card

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using personal loan to pay off credit card

Brace yourself for an intimidating statistic. As of June 2015, credit card debt in the U.S. totaled $906.5 billion, an average of $7841 of debt per U.S. household.

If you're one of these Americans with credit card debt, you may be making repayments with high interest rates - the average credit card interest rate is about 15 percent. But instead of dealing with sky-high interest rates, what if you could pay off your credit card debt with a much lower interest rate?

This has to be a fantasy, you might say. But you may be able to do this by using a personal loan.

Personal loans give borrowers access to funds to use at their discretion -- in other words, they allow consumers to use these funds for personal use.

These types of loans are typically unsecured loans, meaning they don't require you to put down collateral to obtain the loan. This is unlike secured loans like mortgages or a car loans, where you typically use your home or car as security for repayment of your loan - which your lender can take if you don't make your payments.

While personal loans may have higher interest rates than secured loans, they often offer lower interest rates than credit cards -- some as low as six percent, though you typically will only qualify for rates this low if you have excellent credit. The average credit card interest rate is close to 15 percent, although if you have excellent credit, you may qualify for a lower interest rate.

A personal loan may be an enticing option if you have a lot of credit card debt, as it could allow you to pay off your high-interest credit card debt and then pay off the personal loan at a lower rate. Typically, as most lenders have a $1,000 to $3,000 loan minimum, personal loans are a viable option only if you have several thousand dollars of debt.

In other words, using a personal loan to pay off credit card debt could help you save money on interest and potentially get out of debt faster.

Taking out a personal loan to pay off your credit card may make financial sense in the short term. But a personal loan may not be a viable long-term solution unless the root cause of debt is addressed.

Is your debt the result of an overspending issue or a lack-of-income issue? Whatever the cause may be, consider identifying and treating the cause of debt by making lifestyle and financial changes before taking out another loan.

Beverly Harzog, consumer credit expert and author of The Debt Escape Plan, offers another alternative to personal loans. "If you have an excellent credit score, you may be better off getting a balance transfer credit card that offers a zero percent introductory APR. This way, you can pay off the debt without paying interest." Of course, this is only true if you pay off your balance before the zero percent introductory APR period expires.

If your credit score isn't high enough to qualify, though, a personal loan may be a good option. Harzog says, "Your goal is to get an interest rate lower than the one you're currently paying on your credit cards."

What are some potential issues with using a personal loan to pay off credit card debt? Shannon McLay, founder of financial services company The Financial Gym says, "It's important to note that your interest rate with a personal loan may be lower than your credit card rates; however, you're locked into a set monthly payment for a specific period of time and this monthly payment may be higher than the minimum payments on your credit cards."

So you may save money on interest, but your overall payments could be higher and present a cash flow issue. And according to McLay, if you miss payments on your personal loan, it most likely will negatively impact your credit score.

Taking out a personal loan to pay off credit card debt is an unconventional alternative that could save you money over time. If you've treated the root cause of debt and have stable cash flow, a personal loan might be an attractive option.

However, it's important to read the terms and conditions and ask a lot of questions. Harzog advises borrowers to "read the fine print carefully and look for fees, such as loan origination fees and pre-payment penalties." Loan origination fees are charged by the lender and are typically a small percentage (5 percent or less, generally) of the total loan. Pre-payment penalties are additional fees added for borrowers who pay off their loans early.

And if you decide to take out a personal loan, try to work with a reputable lender.

How can you do this? "It's a good idea to check with a local credit union or your own community bank and see if you can get a personal loan that way. There are also loan comparison sites that can help you find the best rates. When you choose a lender, check the BBB (Better Business Bureau) to see if there have been any complaints before you sign a contract," Harzog says.

In short, a personal loan can be a viable option to pay off credit card debt, but it's important to do your research and to ensure it makes financial sense for you in the long run.

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2 People Helped

A personal loan is a good idea to improve your credit card debt ratio especially if it is very high. However, if you are really committed to paying down your debt quickly if you take the personal loan too quickly while your debt ratio is very high (your FICO score is low at this time) you will have to pay a higher interest rate. Therefore it helps if you could first cut down all your fixed and variable expenses for a few months and pay down the debt as fast as you can using any and as much of your savings as you think is not too risky. While doing this I noted that although my FICO scores and reports (the free ones) did not immediately show that I had paid down $15,000 in debt bringing down my credit card debt ratio from about 70% to about 46%, I noted that my personal loan offers started increasing much more quickly in terms of the number of loan offers and their lower interest rates. I started paying down my debt around the end of March 2016 at which time the interest rates for personal loans were about 20% and higher. Now about 2 weeks later even though the "free9quot; bank FICO scores and reports don't reflect my improved credit card ratio, the financial institutions making the personal loan offers have noticed that I have paid off about 10 credit cards and had a $3000 credit increase. Today I have had 11 personal loan offers from Lending Tree right here at CK for loans between 8,000 and 32,000 with interest rates mostly at the 10% rate thru 13% range with no hidden fees and no loan origination fees. However, I have decided to hold off on this and do it a bit later when my FICO score is clearly seen to be higher by the credit card institutions. You see I have about $29,000 in debt remaining on 3 credit cards. I am using bank A's credit card to do a balance transfer to bank B's credit card at a very low interest rate for about $3,000. A bit later I plan to use bank B's credit card to do a balance transfer on Bank A's credit card for $5,000. These 2 banks charge me a regular interest rate of 16% normally but on balance transfers its 0 thru 6% and with one of them with zero transfer fee. The 3rd credit card charges me 8% so I pay that balance of 9,000 a bit slower. This plan is already set so I have to be patient for another month or so for my FICO score to reflect my debt ratio drop consistently as I am doubling up on paying my big balance (about 15,000) to about $600 plus a month using the savings cash flow I have already reaped by eliminating 10 accounts with interest rates in the 21 to 27% range. As my debt ratio continues to go down aggressively I plan to apply for another big credit card that is like pre-approved with a soft credit check to be approved which at worst case I will be denied and lose about 2 FICO points for a little while. However, the odds are I will be approved as the FICO score is increasing with my aggressiveness. When the personal loan offers start dropping into the 6 to 12% range I will dip into them and wipe out the credit card debt that remains in the 16% range. The lesson learned here is that it is very easy for anyone to spend beyond their means but it takes aggressive single mindedness to get yourself out of the hole. Of course I will now ensure that I only carry one or two credit cards for emergencies, always use my debit/cash cards first and keep my credit cards minimally active at about 1 to 5 % debt usage once or twice a year to ensure that my creditors don't close those accounts. I will not need to apply for more credit cards unless I see one that is very prestiguous with a very low interest rate but I will at most do that only once a year. I am already beginning to feel a sense of "credit power" and although I am not yet into the "excellent9quot; FICO category, this issue already seems resolved. I now think that 12 to 16% is "high9quot; interest and a little while ago I would have jumped at those 11 offers. You can win this credit game if you really have a desire to do so.