Banking

Should you take out a personal loan to pay off credit card debt? Here’s how it could save you money – News Opener

Credit card debt can quickly turn into a cycle of never-ending payments. Thankfully, there are several solutions if you’re looking to get ahead of your debt and pay it off faster.

One way is to apply for a personal loan to effectively move your debt from your credit card issuer to a personal loan lender and hopefully snag a smaller interest rate and better repayment options. By doing so, you’ll likely pay less in interest in the long run and can eventually become debt-free. There are also a few other options that are worth considering if you want to consolidate debt efficiently and cheaply.

Below, Select details what you need to know about using a personal loan to pay off credit card debt, and how to get started.

Subscribe to the Select Newsletter!

Our best selections in your inbox. Shopping recommendations that help upgrade your life, delivered weekly. Sign-up here.

Benefits of using a personal loan to pay off credit card debt

Credit card debt has ballooned recently as Americans continue to cope with record-high inflation for everyday goods such as gas and groceries. Unfortunately, trends like this can create a slippery slope since credit cards tend to have high-interest rates, allowing consumers to rack up debt even quicker.

If you’ve found yourself in a credit card debt loop, you may want to think about using a personal loan. Here are two reasons why using a personal loan to pay off credit card debt could make sense for your situation.

Personal loans have lower interest rates than credit cards

According to the most recent Federal Reserve data, the average credit card interest rate in May 2022 was 15.13%. In the same month, personal loan interest rates averaged 8.73% for a 24-month loan.

Let’s say you have $8,000 in credit card debt that you’d like to pay off. If you kept the balance on your credit card, you’d end up paying $1,326 in interest. If, instead, you applied for a personal loan and paid that down over two years, you’d end up paying $747 in interest — that’s a difference of $579 in interest.

And keep in mind that these interest rates are just averages. LightStream, Select’s best overall pick for personal loans, offers APRs ranging from just 3.99% to 19.99% when you sign up for autopay, depending on your terms. So, your savings can be even greater.

You can reduce the number of monthly payments you have

If you happen to have more than one credit card with a revolving statement balance, opting for one concise monthly payment with a personal loan could be helpful. Rather than focusing your efforts in multiple places, you’ll have all your debt in one place and can put your energy into paying that down. Plus, the more money you put toward the personal loan, the faster you can pay it down and the less overall interest you will pay.

Drawbacks of using a personal loan to pay off credit card debt

Using personal loans to pay off credit card debt doesn’t come without risk, however. Here are a few cons to consider before you apply for one.

Personal loans could lead to more debt

If you decide to take this route, it’s important to use a personal loan as a means to an end. Even if you use one to pay off your debt, you could quickly find yourself with credit card debt once again, along with a personal loan for your former debt if you’re not careful.

If you do take out a personal loan to pay off your credit card debt, make sure you immediately pay off your credit card balances with the cash from the loan. Some lenders, like Marcus by Goldman Sachs Personal Loans, will do this automatically for you when you apply for a loan. Then have a plan in place to pay back your loan and create a budget so you don’t overspend.

A lower interest rate isn’t guaranteed

While there’s a large disparity between the average interest rates for credit cards and personal loans, there’s no guarantee you’ll end up with a better rate. Find out the exact interest rate you’re paying on your credit card and do your best to track down a better interest rate with a personal loan. Factors like your credit score, loan amount and term length can all impact what APR you qualify for.

Check out Select’s personal loan marketplace which will allow you to see what loans you’re pre-qualified or pre-approved for. It’s free, will not impact your credit score and allows you to compare interest rates from different lenders.

Personal loans have fees

As you’re researching different lenders, consider any fees you may be charged for the personal loan, which can include application fees, origination fees, prepayment penalties, late payment fees, returned payment fees or payment protection insurance. If the difference in interest rates is small between your credit card and personal loan, the fees can negate any potential savings.

Best personal loans for paying off credit card debt

If a personal loan sounds like a viable solution for your financial needs, here are a few of Select’s favorite lenders to choose from. Select ranked LightStream as the best personal loan lender overall because of its low interest rates and flexible terms, but PenFed is also good for those seeking smaller loans and Discover for those seeking fast funding. These loans also don’t have origination or early payoff fees.

LightStream Personal Loans

  • Annual Percentage Rate (APR)

    3.99% to 19.99%* when you sign up for autopay

  • Loan purpose

    Debt consolidation, home improvement, auto financing, medical expenses, wedding and others

  • Loan amounts

  • Terms

  • Credit needed

  • Origination fee

  • Early payoff penalty

  • Late fee

PenFed Personal Loans

  • Annual Percentage Rate (APR)

  • Loan purpose

    Debt consolidation, home improvement, medical expenses, auto financing and more

  • Loan amounts

  • Terms

  • Credit needed

  • Origination fee

  • Early payoff penalty

  • Late fee

Discover Personal Loans

  • Annual Percentage Rate (APR)

  • Loan purpose

    Debt consolidation, home improvement, wedding or vacation

  • Loan amounts

  • Terms

  • Credit needed

  • Origination fee

  • Early payoff penalty

  • Late fee

Select’s personal loan marketplace

Check out Select’s personal loan marketplace which will allow you to see what loans you’re pre-qualified or pre-approved for. It’s free, will not impact your credit score and allows you to compare interest rates from different lenders.

Another way to consolidate credit card debt

While taking out a personal loan is a solid option for paying off credit card debt, another way to go about it is to sign up for a balance transfer credit card that comes with a 0% introductory APR. With this type of card, for a specified amount of time, its balance will not incur any interest as long as you make the minimum payment each month.

For example, the Wells Fargo Reflect® Card offers a 0% introductory APR for 18 months from account opening (after, 15.24% – 27.24% variable APR) on purchases and qualifying balance transfers. (See rates and fees.) It’s also possible to extend that 0% APR up to three more months by making the minimum payments on time throughout the intro and extension periods. Balance transfers made within the first 120 days also qualify for the introductory rate.

That means you could end up earning up to 21 months of interest-free financing on your current debt as long as you make the minimum payments. If, for instance, you have $8,000 in credit card debt to pay off and can make $400 monthly payments during the 0% intro period, you won’t pay a dime in interest.

Keep in mind, however, that there is typically a 3% fee to transfer a credit card balance.

If a personal loan doesn’t suit your needs, consider using a 0% intro APR credit card such as one of the following listed below:

Citi® Diamond Preferred® Card

  • Rewards

  • Welcome bonus

  • Annual fee

  • Intro APR

    0% for 21 months on balance transfers; 0% for 12 months on purchases

  • Regular APR

  • Balance transfer fee

    5% of each balance transfer; $5 minimum. Balance transfers must be completed within 4 months of account opening.

  • Foreign transaction fee

  • Credit needed

Pros

  • No annual fee
  • Balances can be transferred within 4 months from account opening
  • One of the longest intro periods for balance transfers

Cons

  • 3% foreign transaction fee

Chase Freedom Unlimited®

  • Rewards

    Enjoy 5% cash back on travel purchased through Chase Ultimate Rewards®, our premier rewards program that lets you redeem rewards for cash back, travel, gift cards and more; 3% cash back on drugstore purchases and dining at restaurants, including takeout and eligible delivery service, and 1.5% on all other purchases

  • Welcome bonus

    Earn an extra 1.5% on everything you buy (on up to $20,000 spent in the first year) – worth up to $300 cash back. That’s 6.5% on travel purchased through Chase Ultimate Rewards®, 4.5% on dining and drugstores, and 3% on all other purchases.

  • Annual fee

  • Intro APR

    0% for the first 15 months from account opening on purchases and balance transfers

  • Regular APR

  • Balance transfer fee

    Intro fee of either $5 or 3% of the amount of each transfer, whichever is greater, on transfers made within 60 days of account opening. After that, either $5 or 5% of the amount of each transfer, whichever is greater.

  • Foreign transaction fee

  • Credit needed

Wells Fargo Active Cash® Card

On Wells Fargo’s secure site

  • Rewards

    Unlimited 2% cash rewards on purchases

  • Welcome bonus

    Earn a $200 cash rewards bonus after spending $1,000 in purchases in the first 3 months

  • Annual fee

  • Intro APR

    0% intro APR for 15 months from account opening on purchases and qualifying balance transfers; balance transfers made within 120 days qualify for the intro rate

  • Regular APR

    17.24%, 22.24%, or 27.24% variable APR on purchases and balance transfers

  • Balance transfer fee

    Introductory fee of 3% ($5 minimum) for 120 days from account opening, then up to 5% ($5 minimum)

  • Foreign transaction fee

  • Credit needed

Bottom line

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.

 Source link

Back to top button