Here are the key takeaways to consider before deciding whether to use a personal loan to pay off credit card debt:
- Using a personal loan to pay off credit card debt can help you save on interest and simplify your payments, but it’s important to weigh the pros, cons, and alternatives for your unique situation.
- Personal loans often have lower interest rates than credit cards, so more of your payment goes toward reducing your debt rather than paying interest.
- Consolidating multiple credit card balances into one personal loan streamlines your finances with a single, predictable monthly payment.
- Alternatives like balance transfer cards or structured payoff strategies (such as the snowball or avalanche methods) may be better suited for some borrowers.
Personal loans may be a great way to eliminate high-interest credit card debt. But it’s crucial to know the pros and cons of a loan for this purpose.
Credit cards are convenient, especially for large purchases, planning travel, handling an emergency expense, or a host of other uses. The responsible use of credit cards over time is also an excellent way to build one’s credit history, helping to pave the way for qualifying for more substantial loans, such as a car loan or a mortgage, in the future.
However, it’s important to pay careful attention to credit card balances, especially in times of shifting interest rates. Rising interest rates may result in larger minimum payments and account balances that grow more quickly.
One potential strategy for managing high-interest credit card debt is to consolidate it using a personal loan.
While a personal loan may be a powerful financial tool, one used by many, it’s important to decide if it’s the right option for your unique financial situation.
What Is A Personal Loan?
First things first. A personal loan is typically a lump-sum loan. As opposed to the revolving credit of a credit card, personal loans are paid back on a predetermined timeline, usually in installments. A personal loan also provides you with access to the money you need without using property as a collateral so there is no need to secure it with your home or savings.
There are many different uses for a personal loan; however, they are often used to pay off credit card debt (also known as debt consolidation). While it might seem counterintuitive to take out a new loan to pay off existing debt, in many cases, a personal loan may provide more structure and control.
If the personal loan carries a lower interest rate than your credit cards, a greater portion of each payment can go toward reducing the principal rather than covering interest. This results in faster card balance payoff and less interest paid over time. Some personal loans may also come with fewer fees and more predictable monthly payments, which may help make budgeting easier.
What Are The Advantages of Personal Loans?
If getting rid of credit card debt—and the higher interest payments that may go with it— sounds appealing to you, a personal loan may have several distinct advantages.
- Lower interest rates. As mentioned earlier, personal loans usually have lower interest rates than credit cards.
- One payment a month, not several. Are you consolidating debt from multiple credit cards? With a personal loan, keep track of just one monthly payment.
- Easier budgeting. A personal loan has fixed payment terms, so you know precisely how much to set aside every month.
- Quick loan processing. As long as you provide proper documentation in your application, the decision on a personal loan application, such as at PNC Bank, usually takes place within days.
- Set repayment period. A rapidly growing credit card balance is never any fun. Eliminating revolving credit card debt by using an installment loan will enable you to pay off that balance within a defined time frame.
What Are The Disadvantages of Personal Loans?
While a personal loan is often a great avenue to transform credit card debt into something more manageable, it’s also important to realize its potential downsides.
- Extra Fees. While PNC Bank does not, some lenders will charge an application fee and/or origination fee to process your loan.
- You may not qualify for better rates. Depending on your credit score and credit history, you may not qualify for a personal loan that has a lower interest rate than your current credit card debt.
- Prepayment Penalties. While PNC Bank does not charge a fee to those paying off a personal loan early, other lenders may.
- Additional debt. A personal loan is a debt that needs to be repaid. You could wind up in an even more difficult financial situation if you use a personal loan to pay off your credit cards and then continue to accumulate more credit card debt.
As a reminder, when assessing the potential advantages and disadvantages of a personal loan to pay off credit card debt, conduct research and be sure you understand the terms and conditions of the loan and the impact on your current financial situation as you make any decisions.
Also, be sure to compare your expected monthly personal loan payment versus your current monthly outlay in minimum credit card payments, particularly if your personal loan has a short repayment term. Finally, know that application or origination fees may vary depending on the lender and the quality of your credit, with fees that could be as high as 10% of the total loan amount.[1]
With all of this in mind, it’s important to view a personal loan as part of your overall strategy to reduce debt. That strategy should include taking a close look at spending patterns, establishing a monthly budget, and developing habits that create long-term financial health.
When a Personal Loan Might Make Sense — And When It Doesn't
A personal loan may be useful, but only when tied to a clear purpose. The examples below show some situations when it may support your financial goals, and others when it could create more strain.
A personal loan might make sense if you:
- Are consolidating high-interest credit card debt: Replacing revolving balances with a lower-rate installment loan may reduce total interest paid.
- Have a plan to repay the loan: A clear repayment timeline and consistent income make the loan easier to manage.
- Need to cover a one-time, essential expense: This might include medical bills, urgent home repairs, or car-related costs.
- Want predictable monthly payments: Fixed terms and rates may help create a more stable budget.
- Have a strong enough credit profile to qualify for better terms: Lower interest and fees may only be available if your credit score supports it.
A personal loan might not be the right choice if you:
- Are using it to fund ongoing expenses: Covering rent, groceries, or other recurring costs may lead to unsustainable debt.
- Don’t have a plan to change spending habits: Without behavioral changes, there’s a risk of running up new credit card balances after consolidation.
- Would struggle to afford the monthly payment: Missing payments could harm your credit further and add fees or penalties.
- Could qualify for lower-cost alternatives: Depending on your situation, balance transfer offers or repayment plans might be more appropriate.
How Debt Consolidation Affects Your Credit
Consolidating credit card debt with a personal loan may help your credit score, but it depends on how you manage the process. Several key factors play a role in how consolidation affects your score, some immediately, and others over time.
Applying for a new loan typically requires a hard inquiry, which may trigger a temporary dip in your credit score. This usually resolves within a few months, especially if you manage the loan well. Once the loan is in place, your payment behavior becomes critical. On-time payments build credit while missed payments genreally harm your credit score.
Credit utilization (the amount of credit used relative to your available limit) is another key factor in your credit score. Paying off credit card balances with a personal loan may lower your utilization rate, which could have a positive impact. A mix of different credit types, including both revolving and installment credit, may also contribute to a stronger score. Since personal loans are installment loans, this could add variety to your credit mix.
Finally, don't rush to close your old credit accounts. While it might be tempting to close paid-off cards, doing so may shorten your credit history and increase your credit utilization ratio. If you can avoid new spending, keeping older accounts open often benefits your credit score.
Alternatives To Consider
A personal loan isn’t the only way to reduce credit card debt. Depending on your situation, one of the options below may be a better fit.
Balance Transfer Credit Cards
Some credit cards offer low or 0% introductory interest rates on balance transfers for a limited time, typically 12 to 18 months. This may provide temporary relief from interest, helping you pay down the principal faster. However, these cards often come with transfer fees, and the interest rate may jump significantly once the intro period ends. Be sure to read the fine print and have a plan to pay off the balance before the promotional period expires.
Debt Payoff Strategies
If you prefer not to take on new debt, structured repayment methods like the snowball or avalanche strategies may help. The snowball method focuses on paying off the smallest debts first to build momentum. The avalanche method targets debts with the highest interest rates, potentially saving more money over time. Both rely on consistency and discipline rather than new credit.
How To Pay Off Credit Card Debt With a Personal Loan
If you decide a personal loan is the right approach for consolidating credit card debt, the following steps can help the process go as smoothly as possible.
Step 1: Review Your Current Debt
Write down the interest rate, minimum payment, and amount owed on each credit card. Total it up to determine the total amount of debt you may want to consolidate.
Step 2: Check Your Credit Score
Your credit score will influence the rates and terms you're offered. Many banks, credit card issuers, and credit monitoring services provide free access to your score. Understanding where you stand helps you set realistic expectations for the loan terms you may qualify for.
Step 3: Compare Loan Options
In addition to interest rates, it's also important to consider fees, repayment terms, and overall loan costs. Online loan calculators help you see how different options will affect your monthly budget and total repayment.
Step 4: Gather Necessary Documents
Being prepared helps streamline the application process. Lenders typically request:
- Current address. (If you’ve lived at your current address for less than two years, some lenders, such as PNC Bank, will ask you to also supply your previous address.)
- Your annual income
- Your creditor information, including existing outstanding loan amounts and current monthly payments
Step 5: Apply and Wait for Approval
Once you've chosen a lender, you can usually apply online or in person. Some approvals happen in a few minutes, while others may take a few days, depending on the lender’s process and the information you’ve provided.
Step 6: Pay Off Your Credit Card Balances
Once you've received the funds, use them to immediately pay down the credit card balances. Check each credit card account to confirm the balance is fully paid and no further interest or fees have accrued. This extra step helps ensure you don’t accidentally miss a small remaining payment.
Step 7: Implement Your Loan Repayment Plan
Once your loan is in place, it’s important to stay organized and consistent. If possible, set up automatic payments to avoid missed due dates and late fees. Keep an eye on your balance and regularly track your progress. As your budget or income changes, revisit your plan and make adjustments as needed.
Set Yourself Up for Success
A personal loan may help simplify payments and reduce interest, but it should be part of a larger effort to improve financial stability. Without a plan to manage spending going forward, there’s a real risk of taking on new debt while still repaying the old.
Before using a personal loan to pay off credit card debt, consider what contributed to your current balances. Unplanned expenses, inconsistent budgeting, or spending beyond your means may all play a role in debt accumulation. By identifying these patterns and building a more intentional approach, you may be more likely to see positive results from your consolidation.
Are you ready to make your debt more manageable? If you think a personal loan is the right option to explore, learn more about PNC's Personal Loan or visit a PNC branch for an in-person conversation.
