Pros And Cons Of Using A Personal Loan To Pay Off Credit Card Debt
A personal loan is an unsecured loan offered by banks and financial institutions The loan amount can be used for a variety of financial requirements like financing a trip, getting a car or even paying off your credit card debts. To apply for a personal loan you can do research on the financial market and look for lenders that offer the best deals on a loan. Once your loan is approved you can use the funds to pay off your credit card debt. Based on the type of loan you will be responsible for the consolidation of your credit cards debts, or the lender will ask for your creditor information to pay the outstanding balance that is to be paid towards your credit card. In the case of personal loan, you now owe money to one lender instead of several and might be with a lower interest rate and monthly payment. To calculate your EMI you also get access to an online personal loan EMI calculator.
Pros of using a Loan To Pay Off Credit Card Debt
1. Get a lower rate of interest on the loan
Personal loans are offered at an average interest rate of less than 10%. The best personal loans are even lower if you have a high credit score, that means you could cut your total interest payment in half and even pay off your debt sooner as the interest rate charged is lower.
2. Streamline payment of debts
If you have multiple credit cards and have to pay a different credit card every month, it could be difficult to keep track of all the due dates and minimum amounts owed. If you default on these payments or pay the minimum amount due, you could face penalty charges and your credit score might suffer. With a loan you can pay such debts in one go, reducing the number of free up time and space for other financial obligations.
3. Easily Boost Your Credit Score
Availing a loan can contribute to your credit mix, which makes up 10% of your score. It shows creditors and lenders that you’re responsible with the money by carrying a good mix of credit and debts. Paying off your credit card debts can help lower your credit utilization ratio. A credit utilization ratio of 30% and ideally under 10% can help you improve your credit score.
4. Clear your Debts Sooner
Making a minimum payment towards your credit card could take you years to pay off your credit card balances. With the help of a loan the funds can be used to pay off these debts right away and you can set up a payment plan to repay your personal loan. If you were on the track of your loan repayment you can pay off your credit cards in 10 years, a personal loan can help you pay it off in less than five years.
Cons of using a Loan To Pay Off Credit Card Debt
1. Taking out a loan can lead to more debt
A personal loan is still a debt that has to be repaid at the end of the tenure. By availing a loan you’re racking up more debt than you had before. A personal loan for credit card consolidation does not free you from debts; use it only if you’ve gone through other options of repayment and it is the only temporary solution.
2. A low-interest rate is not guaranteed
Personal loans tend to offer lower rates of interest compared to credit cards, but for that, you need a good credit history and score. Even if you qualify for a personal loan with bad credit, your interest rate may not be any lower and could be higher than the current rate of interest charged.
3. Applicable Fees & Charges
When availing a loan you will see that lenders have different costs applicable on the loan such as late payment fee, origination fee and insufficient funds fee. Hence, you need to be mindful of such costs when comparing your loan options.
Should you use a loan to pay off your credit card debt?
Before you decide to take a major step on managing your personal finances, you need to see if you have alternative ways to pay off your debt less expensively with a personal loan. Individuals that have a good credit and sufficient income to get approved, using a personal loan can be a smart strategy. However, it’s not a good idea for everyone, you first need to check whether you really need the loan amount and also consider if you can afford the loan repayment. Avoid applying for a loan if you have a poor credit history or might run up fresh bills on your newly liberated credit card. However, being honest with yourself about your spending habits will help you clear your debts and manage your finances accordingly. You can also use a personal loan app to apply for a personal loan.