Using credit cards is a good financial tool that can help you make a purchase or pay off expenses, especially when running out of cash. But paying your statement balance in full on the due date is relatively crucial to your financial health. Otherwise, your credit card debt can quickly pile up, and you may face serious financial problems.
You’ve got several options, though, if your debt has ballooned out of control and many people go for a personal loan to pay it off. A personal loan can help alleviate the financial burden of settling credit card debt.
However, it’s essential to know how to use a personal loan correctly to pay off your credit card debt so you would not pay more in the long run. To help you decide whether you should pay off your credit card this way, we’ve highlighted some essential points you can consider.
What Is A Personal Loan?
A personal loan is a specific amount of money that you can borrow from a bank, credit union, or online lender for various purposes. Whether you need to pay for unexpected medical expenses, renovate your home, or consolidate your debt, you may seek a personal loan.
Unlike a mortgage loan and an auto loan, specifically intended to pay for a house or finance a car purchase, you can utilize a personal loan for any financial need since the bank or lender will not monitor its use.
Because personal loans are usually unsecured, you would not need collateral to back up your loan. It means that none of your assets will be at stake in case of a default. But just like any other loan, it’s not a good idea to default on a personal loan.
Personal loans are commonly utilized to consolidate and pay off credit card balances. However, it should be noted that repaying a personal loan isn’t the same as repaying credit card debt. With personal loans, you would pay fixed installments over a predetermined period until you completely repay the debt.
Benefits and Downsides of Personal Loans
Taking out a loan is a serious financial responsibility. Before you decide to borrow money or apply for a personal loan to pay off your credit card debt, you must understand its benefits and downsides. Else, you will end up dealing with more financial troubles.
What Are The Benefits?
When you’re struggling to settle your credit card payments, taking out a personal loan may be beneficial.
In terms of rates, personal loan rates are more favorable than that of a credit card. By moving your credit card balance to a personal loan with a lower interest rate, you can save money every month.
A personal loan is an excellent way to combine multiple credit card debts into one payment. With that, you can lower your monthly bills for the debts you owe as you can concentrate on paying off one.
More often than not, the monthly minimum payment for a personal loan that consolidated debt is lower than the total monthly minimum payments of separate credit cards. Thus, you can simplify your monthly bills and get out of debt faster.
Paying off your credit card debt with a personal loan can also help improve your credit score. As you pay your credit card’s full balance, you can lower your credit utilization, which will show lenders that you’re a low-risk borrower.
What Are The Downsides?
While a personal loan may sound like an easy solution to pay off your credit debt, it may not be an excellent option for the following reasons.
If your credit card debt has already taken its toll on your credit score, you may not qualify for a personal loan with a lower interest rate. The personal loans that are available for you may or may not be cheaper than continuing to pay down your credit cards. You might need a credit score of over 760 to be eligible for low-interest rates.
A personal loan may not be a good idea to pay off a manageable amount of credit card debt within 12 to 21 months. The small amount you would have to save in interest might not be worth the hassle.
Besides that, consolidating your credit card debt with a personal loan doesn’t eliminate the debt. It is still there but only with better terms for you. However, if you have a problem with spending, a personal loan would just be an ultimate enabler. It can help you get out of your current financial crisis but doesn’t solve the root problem.
Should You Use A Personal Loan Or Not?
You need to consider other essential points to decide whether you should pay off your credit card debt with a personal loan. But weighing its benefits and downsides is an excellent place to start.
It’s also vital to remember that a personal loan is only another financial tool you can use. Whether it’s right for you or not will depend much on how you’re going to manage it. Keep in mind that repaying debt is more of a mindset than a balance transfer.
Thus, before you take out a personal loan to pay off your credit card debt, it can be more helpful to look into your financial behavior as well.
Personal loans are helpful tools to repay debt in certain financial situations. But they cannot resolve issues in financial behavior that may still affect your financial health in the future. If drowning in debt is recurring over time, you need to do something other than taking out a personal loan.