Is it a good idea to use a personal loan to pay off credit card debt? That actually depends on your unique circumstances. Some people can successfully get out of their multiple credit card debt by borrowing a personal loan. For others, things get a lot worse.
One thing is for certain, if you are contemplating borrowing another loan to pay off your credit card balance, things are not looking good for you. This is the reason why you should never max out your credit cards. It can be very overwhelming. The fact that it has a high-interest rate makes things even scarier.
Borrowing personal loans is a common practice for a lot of people. According to statistics, 3 out of 10 Americans take out personal loans within a 12 month period. This is an estimate of 83.5 million individuals. It is not clear why Americans borrow this type of loan. It is actually one of the most versatile types of debts because it can be used for practically anything. You can use it to finance a vacation. Or you can use it to pay for your wedding. It is also possible to use it to pay off your credit card balance. Of course, the question is, would that be a smart move?
Advantages of using a personal loan to pay off your cards
There are advantages to using a personal loan to pay off credit card debt. But before you do that, you need to ask yourself why this is the debt solution that you want to use.
Some people just want to pay off their debts a lot faster. According to a report, 8 out of 10 credit card holders regret the debt their accumulated. Apparently, the main regret lies in the fact that they cannot pay the debt quickly. When this happens, they end up paying more towards the debt because of the high-interest rate. All of these combined causes them unnecessary stress.
It is no wonder some people are trying to look for ways to quickly get rid of their credit card debts. One of the ways to do this is through a personal loan. When they borrow the loan, they can use it to completely pay off their credit card balance. This will leave them with just the personal loan to pay back.
There are several reasons why this can be beneficial to you.
Lower interest rate
First of all, you do not have to worry about the high-interest rate. Personal loans are usually offered at a lower interest rate than credit cards. The latter is actually notorious for having high-interest rates so practically all types of debt have a lower rate than them. If you have a good credit score when you apply for the loan, it is possible for you to get an even lower rate.
Predictable monthly payments
Another benefit of using a personal loan to pay off credit card debt is having predictable payments every month. Your monthly credit card payments are usually different from one month to the next. This is why it is a bit hard to budget for it. However, if you pay a personal loan, you are usually required to pay a fixed amount each month.
The final benefit of using a personal loan is consolidation. This is one of the debt consolidation options that will make your monthly payments easier. When you pay off your credit card balance using the personal loan, you are left with a single monthly payment. Instead of trying to monitor different card accounts, you are left with just one. This will ensure that you will not miss out on a payment. It also means you will not incur late penalties. In effect, it can help you save money.
Disadvantages of using a personal loan to pay credit cards
While the advantages of using a personal loan to pay off credit card debt are appealing, you also have to be cautious of the disadvantages that could end up compromising your financial position. These disadvantages should be considered carefully because it will tell you if you can use personal loans or not.
Can cost you more each month
If you do not have the right financial conditions, you might end up paying more on your debt. First of all, you need to have a good credit score if you want to use a personal loan. A good credit score is usually anything above 720 (FICO score). If not, you will be given a higher interest rate and that will cost you more money in the long run. And if you stretch your personal loan payments, this will also make you pay more on the interest. In effect, this will cost you more on the overall payment on the credit card debt.
Can lead to more debt
Another disadvantage is the risk of your debt growing. Some people borrow the personal loan with the intention of using it to pay off the credit card debt. Once they have paid off the balance, they start using the cards again. This leaves them with both the personal loan and the new credit card debt. You need to make sure that you can control your spending urges if you want to use a personal loan. Otherwise, you will just make things worse.
Tips when using a personal loan to pay off debt
While it is possible to pay off credit card debt through a personal loan, it is very important that you approach it with a strategy. Do not just blindly borrow without knowing the right steps for you to follow. Fortunately, it does not take a rocket scientist to successfully pay off all your debts – not just your credit cards. You just have to be really disciplined and you should always exert control over your spending urges.
Here are some tips that you can use to help you successfully use a personal loan to pay off your debts.
Make sure you have a plan
Start by having a plan. You need to know what you will specifically do after you get approval for the loan. Definitely, you want to completely pay off the balance that you have on your card. But after that, what will happen? You need to have a debt payment plan. How will you pay off the loan? Will you stick to the amount or will you try to pay more so you can get out of debt faster?
Put it in your budget
Whatever you decide, make sure your payment plan is aligned with your budget plan. If you do not have one, it is about time that you create a new budget plan. In this new plan, you have to make sure that your monthly debt payments will be included. This will ensure that this payment will always be funded each month. If your income is not enough to cover it, you need to make sacrifices. You can use the budget plan to review the different expenses that you usually make. Identify which of them you can stop spending on.
Stick to the plan
Finally, you have to make a commitment to stick to the plan. It does not matter if you have the perfect plan. If it is not executed well, it will be useless. That means you have to make sure that you follow through with the plan. You need to keep up with the payments. If you plan to use your tax refund to pay off a bigger portion of the debt, you need to stick to that. If you make a commitment to stop using your credit cards until you have paid off the personal loan, you have to use only cash. You have to discipline yourself so you can keep yourself from making your financial situation worse.