On average, an American household has over $6,000 in credit card debt and up to $37,000 in student loans. It’s a scary combination, and many adults wonder if there is a way to get a loan to pay off credit cards. Most personal loans can be used to pay off any debt you have or can be used for other needs.
While the credit card debt issue is less than student loan debt (by a lot), it can actually hurt your financial well-being more than the student loans. You’re likely to see higher interest rates and have low minimum payments, which means you’re barely paying anything on the principle. If you are deep in credit card debt, it might be time to seek out a loan to cover them all.
How to Use a Loan to Pay off Credit Cards
While some lenders call it a debt consolidation loan, you can use a personal loan to cover credit card bills. The goal is to try to get a loan that has a lower interest rate than your credit cards. Plus, you get a set period for repayment, which means you have a pre-determined repayment plan.
For example, you owe $4,000 on your credit card, and it has an 18.00-percent APR. If you got a three-year personal loan for that same amount and it included a 12.00-percent APR, you could expect your monthly payment to be around $133 with $783 in interest throughout the three years.
If you kept that balance on the credit card and paid about $133 each month, it could take up to three-and-a-half years to pay it off, and you’d pay about $1,359 in interest during that time. You’d save almost half and pay off the debt a little faster going with the loan.
Most people use a loan to pay off credit cards and consolidate multiple cards into one monthly payment with one lower interest rate.
Advantages of Paying off Credit Card Debt with a Loan
One of the best reasons to get a loan to cover your credit card debt is to lower your interest rate. Any small change in the interest rate can make a significant difference, especially if you owe a lot on credit card debt. However, it’s not a guarantee that you’ll have a lower interest rate with a personal loan. It all depends on creditworthiness and other factors.
Another excellent reason to pay off credit card debt with a personal loan is so that you can make a single payment each month. Yes, you may pay more in one lump sum, but you don’t have multiple payments to remember to make each month. Even if you only pay the minimum payments, you’re still likely to pay $300-$400 each month on credit card debt. You might still pay a similar amount, but to one company and at the same time each month.
Because you’ve only got to pay one debt each month and it comes with a fixed interest rate, it’s possible to pay off the loan quicker. Credit cards rarely have a set repayment plan. If your balance is high, you might never get out of debt if you just pay the minimum amount.
The amount you pay each month goes toward the interest accrued first. Anything left over goes toward the principle. That means each month you’re likely to have a similar interest charge without knocking much off the overall balance. Since interest rates can fluctuate, you might spend more on interest than the balance, which means you’re always revolving in debt. Getting a loan to pay off credit cards can stop the revolving debt issue once and for all.