Using credit cards is a good financial tool that can help you make a purchase or pay for expenses, especially when you’re running low on cash. But paying your statement balance in full by the due date is relatively crucial to your financial health. Otherwise, your credit card debt can add up quickly and you could face serious financial problems.
You have several options, however, if your debt has gotten out of hand and many people are taking out a personal loan to pay it off. A personal loan can help ease the financial burden of credit card debt settlement.
However, knowing how to properly use a personal loan to pay off credit card debt is essential so that you don’t pay more in the long run. To help you decide if you should pay your credit card this way, we’ve highlighted a few key 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 a variety of purposes. Whether you need to pay unexpected medical bills, renovate your home, or consolidate debt, you can apply for a personal loan.
Unlike a mortgage and auto loan, which are specifically intended to pay off a house or finance a car purchase, you can use a personal loan for any financial need since the bank or lender will not monitor its use.
Since personal loans are generally unsecured, you would not need collateral to back up your loan. This means that none of your assets will be at stake in the event of default. But like any other loan, it’s not a good idea to default on a personal loan.
Personal loans are commonly used to consolidate and pay off credit card balances. However, be aware that paying off a personal loan is not the same as paying off credit card debt. With personal loans, you would pay fixed payments over a predetermined period until you paid off the debt completely.
Advantages and disadvantages of personal loans
Taking out a loan is a heavy financial responsibility. Before deciding to To borrow money or apply for a personal loan to pay off your credit card debt, you need to understand its pros and cons. Otherwise, you will end up facing more financial problems.
What are the benefits?
When you’re having trouble paying your credit card payments, taking out a personal loan can be beneficial.
In terms of rates, the rates of a personal loan are more advantageous than that of a credit card. By transferring your credit card balance to a personal loan with a lower interest rate, you can save money every month.
A personal loan is a great way to combine multiple credit card debts into one payment. With this, you can lower your monthly bills for the debts that you owe because you can focus on paying off one.
More often than not, the minimum monthly payment for a personal loan that has consolidated debt is lower than the total monthly minimum payments for separate credit cards. So 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 off your total credit card balance, you can reduce your credit usage, which will show lenders that you are a low risk borrower.
What are the disadvantages ?
Although a personal loan may seem like an easy solution to paying off your credit debt, it may not be a great 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 available to you may or may not be cheaper than continuing to pay off your credit cards. You might need a credit score of over 760 to qualify 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 it.
Furthermore, consolidate your credit card debt with a personal loan does not eliminate debt. It’s still there, but only on better terms for you. However, if you have a problem with spending, a personal loan would only be the ultimate tool. It can help you get out of your current financial crisis, but it does not solve the root problem.
Should I use a personal loan or not?
There are other essential points to consider when deciding whether to pay off your credit card debt with a personal loan. But weighing its pros and cons is a great place to start.
It is also essential to remember that a personal loan is just another financial tool that you can use. Whether this is right for you or not will depend a lot on how you go about handling it. Keep in mind that paying down debt is more of a mindset than a balance transfer.
So, before you take out a personal loan to pay off your credit card debt, it may also be more helpful to examine your financial behavior.
To take with
Personal loans are useful tools for paying off debt in certain financial situations. But they can’t fix the financial behavior issues that can still affect your financial health in the future. If the drowning in debt is recurring over time, you need to do something other than take out a personal loan.