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Like all loans, personal loans should be used thoughtfully and studiously paid back.
- Personal loans are commonly used to consolidate and pay off credit card balances.
- When you consolidate to a lower interest rate, you will likely save money while paying off the debt.
- In addition to a lower interest rate, moving to a personal loan generally gives you a shorter payback period.
- Like all loans, personal loans should be used thoughtfully and studiously paid back.
- Read more personal finance coverage.
Credit cards are a great way to earn miles and points, but if you're not careful, it's easy to spend more than you can afford and pile up big balances that are tough to pay off. However you built up balances on one or more credit cards, it's a good idea for your personal finances to pay them off as quickly as possible.
One strategy some people use to pay off credit cards is consolidating to a personal loan. Here's a look at three big benefits of merging your balances into one personal loan instead of paying off each card one by one.
Lower interest rate
The most obvious benefit of a personal loan over credit cards is the interest rate. In many cases, you can find personal loans with interest rates well below what you are paying for your credit card. Moving your balance to a lower interest rate saves you money every month.
The annual percentage rate, or APR, is the best way to compare two loans. If one has a lower interest rate, you'll pay less every month for each dollar you borrow. Regardless of the balance, moving to a lower APR always saves you money if you carry a balance from one month to the next.
Fewer monthly payments
If you have balances on several credit cards, consolidating your balances simplifies your life by reducing the number of payments you have to keep track of. Instead of many payments per month, you can pay down the debt with just one balance if you consolidate.
Some savvy people use 0% balance-transfer offers to consolidate their debt, eliminate interest costs, and pay off their cards before the introductory period ends. A personal loan is another great choice, as there is no risk that your interest rate will jump up in the future.
Final payoff date for your debt
Credit cards and lines of credit are forms of revolving debt. With revolving loans, you can continually add to your balance and pay it back off. That's convenient for people who pay the balance off in full every month, but it can also lead to trouble if you are not in the habit of paying off your card in full.
With growing balances, consolidating to a personal loan gives you a final payment date to focus on. If you make the minimum payment every month, it will be paid off in full when you make your last payment. As long as you don't slip into the same habits with the credit cards again, you can stay away from high-interest debt for good.
Use personal loans with care
The big downside of personal loans is the freedom to use them for anything. It may be tempting to use a personal loan like a credit card and borrow for things you don't truly need. If you use personal loans to consolidate credit card debt, take care to avoid getting into more debt again in the future.
Also, keep in mind that personal loans show up on your credit report and influence your credit score. Paying at least the minimum balance by the due date every month will improve your credit score over time. Missed payments, late payments, and underpayments all harm your credit.
If you have a payoff plan in place, a personal loan can be a great tool for getting out of debt for good. Use your personal loan with care to ensure you hit your goal. If you do, you're bound to save money along the way.
Personal Finance Insider offers tools and calculators to help you make smart decisions with your money. We do not give investment advice or encourage you to buy or sell stocks or other financial products. What you decide to do with your money is up to you. If you take action based on one of the recommendations listed in the calculator, we get a small share of the revenue from our commerce partners.
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