Credit cards are highly convenient tools for making important purchases and bills in between pay days but they present a dangerous loophole to your finances as they can spiral your debt out of control. In order to make ease your debt you can substitute your credit card debt for more favorable credit by taking out a personal loan and repaying the debt but this requires careful planning.
The modern spending culture is characterized by credit-based purchasing but credit card debt is one of the most common causes of personal bankruptcy. Credit cards carry higher interest rates and fees compared to other credit facilities including personal loans. Using a personal loan to pay off credit card debt is potentially beneficial in a number of ways which will be discussed in this article. If you are looking to dispense of your runaway credit card debt, taking a personal loan is one of the options that presents itself.
Why Pay off Credit Card Debt with a Personal Loan
Although it is easy to think of it as moving debt around, using a personal loan to pay off your credit card benefits you in a number of ways. First, it is bound to decrease your interest rate and monthly repayments. The annual percentage rate (APR) for credit cards is significantly higher than that of personal loans. In effect, each monthly repayment on a personal loan will pay off more principal than the same monthly repayment on a credit card, thus getting you out of debt much faster. At the same time, the monthly payments on a personal loan will likely be lower than that of credit cards, therefore making your debt more manageable. The repayment schedule on a personal loan is more flexible than credit card debt. You have an option to choose a longer repayment period, and this stretches out the principle, allowing you smaller monthly payments.
The second advantage that comes with taking a personal loan to repay your credit card debts is that you only have to deal with one payment instead of multiple. This is known as credit card debt consolidation. With multiple payments, you have to keep track of many dates and amounts that you have to remit each month. However, with a personal loan, you only have to make one monthly payment, which is much easier to remember and remit.
Deciding Whether to Take a Personal Loan to Pay off Credit Card Debt
Although in principle paying credit card debt using a personal loan seems like a no-brainer, it is not always advisable. The strategy does not always yield the desired results, and under some circumstances can worsen your financial situation. There are a number of factors that can help you determine whether to use this option to settle your credit card debt:
1. Your Credit score
Although personal loans will almost always provide better terms than credit cards, they are nor the only option, neither are they always they best. If you have excellent credit, alternatives such as credit transfer may precipitate greater benefits than a personal loan. With good credit, you can transfer your credit card debt onto a single credit that charges 0% interest, whereas the friendliest personal loans would be around 10% APR.
2. The Loan Terms
The most important goal of paying off your credit card debt is to save you money. Diligent calculations need to be made before indulging to ensure that you are actually going to save off your total payments. If you are unable to get any significant savings, or your final debt increases notably after you take a personal loan you might want to stick with the credit cards or seek an alternative. For example, if your current APR on a $5000 credit card debt is 18% and the bank pre qualifies you for the same amount at 15%, you might find that after the initiation fees and other costs, you end up paying more than $5000. In such a case, no significant benefit can be yielded from this approach.
3. Your income level
While your income will be catered to in your credit rating, you also need to consider how it affects your ability to repay the loan after you have consolidated the credit card debts. If your income is unstable, you might expect your ability to repay the loan to be affected during the course of your repayment creating the need for more credit card usage. Your long-term income projections should therefore be an important consideration.
Resources:
1. https://www.creditkarma.com/personal-loans/i/personal-loan-pay-off-credit-cards/
2. https://www.thesimpledollar.com/credit-cards/blog/should-you-use-a-personal-loan-to-pay-off-credit-card-debt/
3. https://smartasset.com/personal-loans/when-to-pay-off-credit-card-debt-with-a-personal-loan/
4. https://finance.yahoo.com/news/personal-loan-pay-off-credit-124500945.html
