Taking out a personal loan to pay a credit card debt can be less costly because credit cards have higher interest rates compared to personal loans.
On the downside, taking a personal loan to pay off a credit card debt has its financial burdens as most personal loan lenders charge other fees asides from the interest rates, such as an origination fee.
Benefits of Using a Personal Loan to Pay Off Credit Card Debt
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Debt consolidation: You can take out a personal loan to pay off all your credit card debts. Once you have paid all your credit card debts, you will be left with only one debt to worry about, which is the personal loan.
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Lower interest rates: Compared to credit cards, personal loans have lower interest rates. You're likely to be offered an APR of around 14% if you have a high credit score.
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Your credit score can improve in the long-term: Taking a personal can dip your credit score momentarily but will boost it over time. With a lower interest rate and higher monthly payment, you can pay off your personal loan faster, which can increase your credit score.
Disadvantages of Using a Personal Loan to Pay Off Credit Card Debt
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Can lead to more debts: You may be tempted to spend more due to the freed-up credit on your card. If care is not taken, you can incur more debt after paying off your card debt with a personal loan.
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Charges on personal loans: a personal loan is also debt and can have other charges such as an origination fee attached to it, which can range from 1% to 8%. You are also not guaranteed a lower interest rate with a personal loan.
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Short-term damage to your credit score: Applying for a personal loan, whether approved or not, can cause a hard inquiry of your credit report, which can drop your credit score by a few points.
Final Thoughts
Using a personal loan to pay off credit card debt can be a good or bad idea. As much as it can help you consolidate your debts, it is also debt that can lead to more debts if caution is not applied.
Before you apply for a personal loan to offset credit card debt, ensure that you get an offer lower than the interest rate on your credit card debt.
Also, you can instruct the lender to send the money to the credit card issuer directly instead of going through your bank to avoid the temptation of spending the money. Lastly, try to stay within the limits of your credit card to avoid going into debt.