If you're carrying balances across one or more credit cards, a personal loan may provide another way to manage that debt. By consolidating credit card balances into a fixed-term personal loan, you may be able to lower your interest rate, simplify your monthly payments and establish a clear date for becoming debt-free.
Why Credit Card Debt Can Get Expensive
Credit cards are revolving accounts. You can borrow, repay and borrow again up to your available credit limit.
That flexibility is useful, but it can also make balances difficult to eliminate.
When you carry a balance, interest may continue accumulating. And if you're making only the minimum payment, a significant portion of that payment may go toward interest rather than reducing your principal.
The interest-rate difference can be significant. Federal Reserve consumer-credit data tracks rates for both credit cards and 24-month personal loans, and personal-loan rates can be substantially lower than rates charged on interest-bearing credit-card accounts.
Of course, the rate available to any individual borrower depends on creditworthiness and other factors.
How a Personal Loan Is Different
A personal installment loan works differently from a credit card.
You borrow a specific amount of money and generally repay it through scheduled installments over an established period.
Instead of an open-ended revolving balance, you know:
- How much you borrowed
- Your required monthly payment
- Your interest rate or APR
- Your repayment term
- When the loan is scheduled to be paid off
That structure can make debt repayment much easier to plan.
An Example: $20,000 in Credit Card Debt
Imagine you have $20,000 spread across several credit cards with an average APR of 24%.
Now imagine qualifying for a personal loan at a substantially lower APR and using the proceeds to pay those cards off.
The potential benefit isn't simply that one product uses "simple interest." The bigger issue is the difference in APR and repayment structure.
If the personal loan has a meaningfully lower APR, more of your money may go toward reducing the amount you owe instead of interest. A fixed repayment schedule also provides a defined path toward paying the debt off.
Depending on the rate, fees and repayment term, that could potentially save hundreds or even thousands of dollars.
One Payment Instead of Several
Interest savings aren't the only potential benefit.
Suppose you're currently managing four credit cards with four:
- Balances
- Minimum payments
- Interest rates
- Payment dates
Consolidating those balances with one personal loan can potentially turn those four payments into one monthly payment.
That doesn't reduce the amount you owe on its own, but it can make your finances easier to manage.
A Defined Payoff Date
One of the biggest differences between credit cards and personal loans is the repayment structure.
Credit cards can potentially remain open indefinitely.
A personal installment loan generally has a defined term—for example, 36, 48 or 60 months.
Make your required payments according to the agreement, and you'll have a scheduled payoff date.
For someone trying to eliminate debt rather than continue revolving it, that structure can be valuable.
When Consolidation May Not Save You Money
A personal loan isn't automatically cheaper. Before consolidating credit cards, compare:
APR: Is the new APR actually lower?
Fees: Does the loan have an origination fee or other costs?
Term: Are you extending repayment for so long that you end up paying more total interest?
Monthly payment: Can you comfortably afford it?
Total repayment: How much will you pay from beginning to end?
A lower monthly payment doesn't necessarily mean a cheaper loan. Extending repayment over additional years can lower the payment while increasing total interest.
Avoid Running the Cards Back Up
There's another important consideration.
Paying your credit cards off with a personal loan doesn't eliminate your credit-card accounts.
If you immediately begin charging purchases again, you could end up with both personal-loan debt and new credit-card debt.
Debt consolidation works best when it's combined with a plan to control future spending.
Is Credit Card Consolidation Right for You?
Consider asking yourself:
- Am I paying high credit-card interest rates?
- Could I qualify for a lower personal-loan APR?
- Would one monthly payment make my debt easier to manage?
- Can I afford the new payment?
- Will the loan reduce my total borrowing cost?
- Am I committed to keeping my credit-card balances under control?
If the answers point in the right direction, comparing personal-loan options may be worth considering.