Should You Take Out a Loan to Pay Credit Card Debt?

About 51% of people in the US are carrying a credit card debt of over $1,000.

In essence, credit card debts and loans are quite similar. They’re both outstanding sums of money that you need to repay with interest. There are some factors, however, that separates them, and the main one that you might be concerned with is the cost.

If you have a credit card debt that you’re trying to pay off, it may be beneficial to do so by taking out a loan. In this article, we’ll discuss what this means so you can determine if it’s the right solution for you. 

Personal Loan Debt vs Credit Card Debt

Many people tend to use credit cards for large purchases when they don’t want to pay the full amount in one go. By doing this, you can pay back the sum over a longer period through regular installments. This will incur interest, meaning that you’ll ultimately pay more in the long run, but it will be more manageable.

Interest rates vary – most credit cards typically charge between 12% and 24%, but some will charge significantly more than this. A personal loan will generally have lower interest rates, potentially as low as 3%, but could still be up to around 30%.

In most cases, a credit card will charge more interest than a personal loan. Because of this, many people take out loans to pay off their credit card debts. It’s worth noting, however, that there are several factors to look at when trying to determine the best course of action.

Benefits of Using a Loan to Pay Off Your Credit Card

Taking out a loan to pay off credit card debts is a popular strategy. This is due to the various benefits it offers, which are very useful in certain situations.

Lower Interest Rates

This is the main reason people turn to this option. The interest rates for credit cards and personal loans can vary quite a lot, but in general, loans have lower rates.

If you have a good credit score, you might be able to get a loan with a very low-interest rate, and this can result in you saving a lot of money overall on your repayments.

Streamline Payments

Depending on what you use your credit card for, you may have multiple payments each month. The more due dates you have, the harder it is to keep track of everything. Missing a payment can result in sizable fees or a drop in your credit score, so you don’t want this to happen just because things aren’t in order.

With a personal loan, you can consolidate all of your credit card payments into one. Having just one monthly payment to worry about will make it much easier to ensure you make payments on time.

Improved Credit Score

Depending on the type of loan you take out, a credit check might be needed. Banks will do credit checks before granting a loan, but if you go with an online lender, they might not require one.

While a credit check will temporarily lower your credit score, a loan can help improve it in the long run. It will increase your credit mix, showing lenders and creditors that you’re financially responsible. Paying down your debt will also lower your credit utilization, and the lower this is, the better.

Pay Off Debt Faster

No one likes debts hanging over them, and if you’re only making the minimum repayments, it could potentially take you years to pay off a credit card. If you take out an emergency loan, you can pay off your credit card immediately, leaving just one debt to take care of. You can then set up a suitable repayment plan to help you pay it back faster.

You should calculate how long it will take you to pay off the loan beforehand to see how much faster it will be. You also need to ensure you don’t continue to rack up credit card debts, as this defeats the purpose of the loan.

Drawbacks of Using a Loan to Pay Off Your Credit Card

While there are several advantages to taking out a loan to pay off your credit card, there are also some drawbacks. It’s important to know these so that you can determine what the best choice is for you.

Potential for More Debt

You can take out a loan to pay off a credit card, but there’s not much point in doing this if you’re going to continue to build up further credit card debt. Doing this will create even more debt than you had before. You need to act responsibly to prevent this from happening.

Lower Interest Rate Isn’t Guaranteed

In the majority of cases, personal loans have lower interest rates than credit cards, but this isn’t always the case. Before going down this path, you should compare the interest rates to ensure you’re going to be in a better position.

Fees

With both personal loans and credit cards, there can be various fees for things like late payments and insufficient funds, for example. These fees will vary depending on the provider. Make sure you’re aware of the fees associated with a personal loan before you apply for it so that you don’t get caught out further down the line.

Taking Out a Loan to Pay Off a Credit Card

If you want to pay off a credit card debt faster or consolidate all of your payments, then taking out a personal loan can help. It can also help you reduce the overall amount that you have to repay. Just make sure you take into account factors like fees and interest rates so that you know how much you’ll be benefiting from the loan.

At Fast Loan Direct, we offer short-term loans that you can obtain within just a few days. We provide loans between $100 and $35,000, with repayment terms ranging from 3 to 72 months. Click here to get started with your application.