Pros and Cons of Paying Off Your Credit Card with a Personal Loan
Millions of people rely on credit cards for all sorts of things these days. They are so easy to use and are often the perfect solution when you’re running a bit short of cash. Consequently, it can be easy to forget about the interest you’ll be charged and how your minimum payment will increase every time you add new charges to your account. Before you know it, you may have several charge card bills coming in and your budget is beginning to suffer. Often, the first thing that hits most folks is the number of checks they are writing out each month. Of course, they also begin to notice how much money those cards are costing them. If you’re ready to improve your financial picture, it may be time to learn about the pros and cons of taking out a personal loan to pay off high-interest debt before applying.
The first thing you’ll want to do is to add up all your credit card debt and look at the pros and cons of taking out a personal loan. Granted, personal loans have helped a lot of people to regain control of their finances. However, a personal loan may not work out so well for some folks depending upon their personal financial circumstances. It’s often better to take your time researching your options, so you can accomplish your financial goals.
Looking at the Pros When Considering a Personal Loan
- If you can use a low-interest personal loan to pay off a high-interest credit card, you should be able to come out ahead. By reducing the interest rate, you can save a substantial amount of money each month.
- If you are fortunate to be able to get a personal loan with a fixed interest rate, you can look forward to fixed monthly payments. Your payments wouldn’t fluctuate like a variable rate credit card that revolves around federal rate increases.
- Having consistent monthly payments makes it easier to plan out your budget.
- As an added bonus when taking out a personal loan, you could actually improve your credit score. You probably wouldn’t be missing card payments, which lower credit scores. Carrying fewer credit card accounts can also have a positive effect on your credit. In addition, a personal loan could be a way to improve credit because it improves your credit mix.
- Using a personal loan to consolidate your debt may free up additional cash, so you can pay off your personal loan at a faster rate.
- Consolidating debt from several credit cards under one personal loan can reduce the amount of time you spend organizing your budget and paying out bills each month.
- When you only have one personal loan payment per month, you reduce the chances of missing payments on multiple credit card bills and getting hit with late fees or penalties.
Checking out the Cons of a Personal Loan
- Taking out cash from a personal loan can be a great way to pay off high-interest credit cards. However, the moment the credit card is paid off, you free up more money on your revolving line of credit. If you leave the account open, it can be very tempting to use the card again and charge up more debt.
- Don’t assume that you’ll get a better interest rate on a personal loan. Typically, personal loans do offer better interest rates than most credit cards. However, you should always verify the rate on the loan offer before making a decision.
- If you have missed credit card payments in the past or have a poor credit history, you may not be considered for a personal loan. Normally, personal loans are provided by credit unions, banks and several online lenders that may have higher credit standards. In addition, most lenders will not only check your credit history but also your employment and debt-to-income ratio.
- Some lenders may go ahead and approve you for a loan even if your credit score rating is low. However, you should consider the interest rate being offered because it could turn out to be equal to the current rate of your credit card or even higher.
- You also need to consider the amount you are currently spending on credit card debt. Some credit cards charge a yearly annual fee and interest. Others only charge interest. However, some personal loans charge loan origination fees. These fees may range anywhere from 1 to 6 percent of your total loan amount. Be sure to take these types of expenses into consideration before making loan decisions.
Looking at Offers for Personal Loans
As with any type of loan, it’s important for you to do a little research. Many of the loan terms offered by lenders may be similar. However, they can also vary greatly from one lender to another. Listed below are some of the more important lending terms that should be checked and considered before applying for a personal loan:
- Taking out a personal loan with some lenders may cost the borrower more money than anticipated when the lender charges pre-payment penalties for paying off the loan early or origination fees for getting the loan.
- Generally, personal loans can range from loan amounts of $1,000 to as high as $50,000. However, this does not mean you can necessarily qualify for the amount of money you want or need with your credit history or employment record.
- Average term lengths may range from two years to five years on personal loans, so make sure you are comfortable with these terms before signing up.
- It is also important to check the annual percentage rate on the loan you are considering. These rates determine the total amount of interest you’ll pay and the size of the monthly payment amount.
If you have established a good credit rating and can get a personal loan with the terms and interest rate you’re looking for, it might be a good idea to take out a personal loan to pay off high-interest debt today.