A personal loan is an unsecured loan offered by banks and financial institutions. The loan amount can be used for various 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 research the financial market and look for lenders offering the best loan deals. 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 consolidating your credit card debts, or the lender will ask for your creditor information to pay the outstanding balance to be paid towards your credit card. In the case of a personal loan, you now owe money to one lender instead of several and might be with a lower interest rate and monthly payment. You can also get access to an online personal loan EMI calculator to calculate your EMI.
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, which 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 one every month, tracking all the due dates and minimum amounts owed could be difficult. 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
It shows creditors and lenders that you’re responsible for the money by carrying a good mix of credit and debts. Availing a loan can contribute to your credit mix, which makes up 10% of your score. 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 years to pay off your balance. With the help of a loan, the funds can be used to pay off these debts immediately, and you can set up a payment plan to repay your loan. If you were on track with your loan repayment, you could pay off your credit cards in 10 years, and 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 for credit card consolidation does not free you from debts; use it only if you’ve gone through other repayment options, and it is the only temporary solution. A personal loan for credit card consolidation does not free you from debts; use it only if you’ve gone through other repayment options, and it is the only temporary solution. A personal loan is still a debt that has to be repaid at the end of the tenure. By availing of a loan, you’re racking up more debt than you had before.’
2. A low-interest rate is not guaranteed
Personal loans offer lower interest rates than credit cards, but 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 of a loan, you will see that lenders have different costs applicable to loans, such as late payment fees, origination fees, and insufficient funds. Hence, it would be best to consider such charges when comparing your loan options.
Should you use a loan to pay off your credit card debt?
Before you take a major step in managing your finances, you need to see if you have alternative ways to pay off your debt less expensively with a personal loan. Using a personal loan can be a smart strategy for individuals with good credit and sufficient income to get approved. However, it’s not a good idea for everyone, and you first need to check whether you need the loan amount and consider if you can afford the loan repayment. Avoid applying for a loan if you have a poor credit history or might run up new bills on your newly liberated credit card. However, being honest 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.