Should You Use a Personal Loan for Debt Payoff: What To Know

Editor: Suman Pathak on May 28,2025

 

Dealing with credit card debt can be frustrating. Paying high interest rates, seeing the balance grow, and having multiple due dates complicates matters and makes it hard to stay on top of your finances. Some people consider one solution to be applying for a personal loan to consolidate debt. Is this the best option for you, though?

This article will discuss a personal loan for debt, how it works, the advantages and disadvantages, etc.

What Is a Personal Loan for Debt?

A consolidation loan is borrowing a big chunk of money from a bank, credit union, or internet lender and applying it to the repayment of your outstanding debts, mainly high-interest credit card balances.

Rather than paying multiple credit card bills with varying interest rates and due dates, you make one payment monthly on the personal loan. It's consolidation.

Why Individuals Use Personal Loans to Pay Credit Cards

There are a number of explanations why an individual may wish to pay off debt using a loan:

  • Lower Interest Rate: Credit cards tend to have 18% to 30% interest rates. A personal loan may have a rate as low as 6%–12% if your credit is good.
  • Easy Payments: It is easier to deal with one fixed monthly bill than to keep track of multiple credit cards.
  • Fixed Repayment Term: Even though credit cards (which can roll over forever if you just make the minimum payment) do not have an expiration date, personal loans do—usually 2 to 5 years.
  • Improve Your Credit Score: Paying down your credit card balances can decrease your credit utilization ratio, which will improve your credit score in the future.

Example: How It Works

Suppose you have three credit cards with a combined balance of $12,000:

  • Card A: $4,000 at 22% APR
  • Card B: $5,000 at 19% APR
  • Card C: $3,000 at 25% APR

If you are able to borrow with a personal loan of 9% APR for 3 years, your monthly payment will be roughly $382. You'd pay approximately $1,775 in interest during 3 years.

And that's a whole lot less than the cost of keeping the credit card balance and paying just the minimum, 10 years and more than $6,000 in interest.

Pros and Cons of Payoff Loans

As with any money choice, paying off debt with a personal loan has its advantages and disadvantages.

Pros

  • Lower Interest Rate: You will save money in the long run.
  • Single Monthly Payment: It is easier to budget.
  • Fixed Repayment Schedule: You are debt-free on a schedule.
  • Increased Credit Score: Less credit card usage is what credit agencies like.

Cons

  • Upfront Fees: Origination fees exist on some loans (1%–6%).
  • Risk of Further Debt: After you've paid off your cards, you might be tempted to use them once more.
  • Credit Score Expectations: Poor credit scores translate into higher interest rates, or even no credit at all.
  • Longer Loan Term = Greater Interest: Even with a lower interest rate, a longer term can equal more paid over the life of the loan.

Know the loan advantages and disadvantages to assist you in determining whether it is the best option for your individual circumstances.

What Is Credit Card Refinancing

Refinancing a credit card is paying off credit card balances at a lower interest rate with a loan or a balance transfer promotion.

There are two popular methods of doing this:

  • Personal Loan for Debt: Borrow a loan and apply it toward your credit cards.
  • Balance Transfer Card: Borrow a new credit card with a 0% introductory APR (usually for 12–18 months) and transfer your existing balance.

Both processes try to keep you from spending money by cutting out the interest you owe.

So, which do you use?

  • Use a balance transfer if you pay the debt in the 0% promo time and don't make new purchases.
  • Use a personal loan if you'd like a longer term and fixed payments.

Both processes have personal loan cons and pros, so you will need to consider your needs and goals.

Lower Interest Loan Options to Consider

If you’re trying to reduce interest and get out of debt faster, here are some lower-interest loan options beyond just personal loans:

1. Credit Union Loans

Credit unions are known for offering lower rates and more flexible approval criteria than big banks.

2. Peer-to-Peer Lending

Sites such as Prosper or LendingClub enable you to lend to borrowers. You can possibly get a more favorable interest rate if your credit is good.

3. Home Equity Loan (HELOC)

If you have a home, you can get a loan using the equity of your home. They have lower interest but greater risk (your home serves as collateral).

Always look at the interest rates, repayment schedule, and overall cost when looking for lower-interest loan opportunities.

How to Choose If It's the Way to Go

Before you make the decision to pay debt with loan, consider these questions:

1. Can You Get a Lower Interest Rate?

The biggest reason to borrow a personal loan to consolidate debt is to save money. If the interest rate is barely lower than your credit cards, it's not worth it.

2. Will You Stick to the Plan?

If you pay off your credit cards and continue using them, you're merely doubling your debt. Be realistic with yourself about your spending.

3. Do You Qualify?

Lenders consider your income, debt-to-income ratio, and credit score. If your credit score is below 600, it might be difficult to get a good rate.

4. Can You Afford the Monthly Payment?

Ensure that the loan aligns with your monthly budget. A low rate is not of any use if you're paying late.

Personal Loan Risks to Watch Out For

Although personal loans can come to your rescue, there are certain personal loan risks that you must watch out for:

  • Origination Fees: This is withdrawn before you get the money.
  • Prepayment Penalties: Your lender may charge a penalty for paying early.
  • High Interest for Bad Credit: If your credit is not perfect, you may end up with a loan that you pay more for than on your cards.
  • Scams or Predatory Lenders: Always do some research on lenders and steer clear of payday or title loans, which are very high-risk.

Knowing the risks of personal loans may save you from being in an even worse financial position.

What to Do If You're Thinking About It

If you're thinking about getting a personal loan to borrow and pay off some of your debts, just do these easy things:

1. Check Your Credit Score

Get a free credit watcher or a copy of your report. Having a credit score above 670 will typically make you eligible for good interest rates.

2. Shop Around

Consider online banks, credit unions, and peer-to-peer websites. Compare interest rates, fees, and terms.

3. Employ a Loan Calculator

Calculate your monthly payment and overall interest. Compare it with your current credit card experience. Do better than that.

4. Read the Fine Print

Be aware of fees, penalties, and terms that might bite you on the back end.

5. Create a Plan for Avoiding Debt

Cut up the cards, freeze your credit, or set up alerts to remind yourself to stay in check.

Alternatives to a Personal Loan

Not sure a loan is the way to go? Take a look at these other ideas:

  • Snowball Method: Pay off the smallest debt first, then roll payments into the next.
  • Avalanche Method: Pay off the highest-interest debt first to save the most.
  • Credit Counseling: Non-profit organizations will assist you in establishing a payment plan.
  • Debt Management Plan: It consolidates all of your bills into one payment, with no new loan.

Occasionally, simple changes in habits (such as budgeting and spending less) can accomplish it just as well as loans.

Conclusion

Finally, having debt paid off with a personal loan can be an effective method of reducing your financial burden and saving money. Provided that you can get a lower rate of interest. Nonetheless, consider the pros and cons of loans and the risks of personal loans.

If you're sure about never using credit cards ever again and being on a pay plan, this tactic can get you out of debt faster.


This content was created by AI