When you have a lot of credit card debt, one option is to pay the balance with a personal loan. You should not think of this as paying off the credit card, but rather as transferring the balance to a different type of loan. You still owe the same amount, but to a different lender and hopefully with better terms. In some cases, this can be a smart choice, but it also has its pitfalls.
Interest Rate Comparison
Using a personal loan to pay off one or more credit cards can be smart if the personal loan has a lower interest rate than the credit cards. For example, if your credit cards have a high interest rate of 18 percent and you can qualify for a personal loan at just 12 percent interest, this move can result in significant savings, because less of each payment goes toward interest and more of it can go toward paying down your debt.
Monthly Payment
The monthly payment on a personal loan can be either greater than or less than your credit card minimum payment. It depends on the repayment terms for the personal loan. If you are trying to lower your monthly payment, you should get a personal loan with a long repayment term to stretch out the payments. However, this has the drawback of charging you more money on interest overall. A shorter repayment period provides the advantage of getting out of debt more quickly and paying less interest, but the higher monthly payments could put a stress on your budget.
Dangers
When you use a personal loan to pay off a credit card, the credit cards are left with no balance and a lot of available credit. The biggest danger is that you will not be disciplined enough and will accumulate balances on your cards again. This will put you in a situation of not only having to pay your personal loan bills, but also having to pay credit card bills again. If you don't trust yourself to avoid using a card with available credit, you may choose to leave the balance on your card instead of taking out a personal loan, or you may close the card immediately after you pay it off.
Other Options
Although a personal loan can be a suitable choice for disciplined people who know they will not run up their credit card balance again, there are a few alternatives. Home equity borrowing typically has lower interest rates than personal loans, so a home equity loan could help save money. However, it is risky because it puts the home at risk of foreclosure if you miss payments. Another option is to call the credit card company and request a lower interest rate to help save money. Transferring the balance to a new credit card with a zero percent promotional interest rate can help for a period of time, but transfers usually involve fees, and missing a payment could trigger very high interest rates.
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