Should You Get a Personal Loan to Pay off Your Credit Card?

Using a personal loan to pay off credit card debt enables you to consolidate all the money you owe into a single monthly payment. But be careful: personal loans aren't interest-free and can tempt you to spend even more.

Personal loans are just one strategy for paying off credit card debt. Balance transfer credit cards are another option, but both require you to stay disciplined and stop adding to your credit card balance.

This article explains your options for getting out of credit card debt – including the pros and cons of each – so you can choose the best path forward.

How can I use a personal loan to pay off my credit cards?

Debt consolidation is the practice of paying off several small debts with a single large loan. For example, you could pay off your credit cards with a personal loan. That way, you have a single payment due date and a monthly payment to manage – hopefully at a lower interest rate than before.

Balance transfer credit cards are specialized credit products that make it easy to consolidate your debt. It's easy to apply for one (and get approved), and you could pay as little as 0% for an introductory period, and as low as 12.99% interest after the promo period ends.

Pros and cons of personal loans

Using a personal loan to pay off your credit cards is a convenient method of debt consolidation and can offer very low interest rates, but neither approval nor low interest rates are guaranteed.

Here's an overview of the pros and cons of choosing to use a personal loan to pay down your credit card debt:

Pros:

• Consolidates your debt into a single monthly payment
• Interest rates as low as 4%
• May be secured or unsecured
• May help you pay off your debt sooner
• May improve your credit score by lowering your credit utilization ratio

Cons:

• A hard credit check during application could lower your credit score
• Approval isn't guaranteed
• Increases debt potential
• Interest rates as high as 46%
• No minimum payments – you must pay in full every month
• Secured loans may cause you to lose personal assets
• Subject to origination, late payment, and missed payment fees

Take note: Studies show that increased credit limits usually provoke increased spending. Without discipline, adding a personal loan could worsen your debt instead of improving it.

Key personal loan terms

When you take out a personal loan, you and your lender agree on a fixed amount and the repayment term. The principal – the total amount you borrow – could be anywhere from $100 – $50,000, while the term could extend for 6 – 60 months.

The interest rate could also be fixed, or "variable," meaning it changes with the prime rate set by the Bank of Canada. Personal loan interest rates are currently around 7% – 8% in Canada (compared to 21% for credit card interest), but they depend on your credit score, credit history, and the type of loan.

An unsecured loan tends to be more expensive because your lender doesn't get reimbursed if you decide not to pay.

A secured loan uses personal assets as collateral, making you eligible for better interest rates – but only because you'll forfeit your house or car to your lender if you default on your debt.

How to pay off credit cards with a personal loan

Credit card interest charges are the number one reason that people spiral into debt. If you decide to use a personal loan to pay off your outstanding credit card balances, it's important to do so as soon as possible.

You can use this credit card interest calculator to see your payment timeline, as well as how a repayment strategy could help you save time and money repaying the card:

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As you make a repayment strategy, think seriously about whether you can resist the temptation to spend more if you get approved for a personal loan – or if you get the green light to use your credit cards again.

If you decide to proceed, only 7 steps stand between you and paying off your credit cards with a personal loan:

1. Calculate your needs: Add up your total credit card debt and determine the minimum loan you need.
2. Research lenders: Compare banks and credit unions based on their interest rates, loan sizes, term lengths, reputation, and application criteria. If you receive an unexpected windfall, will the lender penalize you for paying off your loan early?
3. Make a budget: Subtract your usual monthly expenses from your monthly income and decide how much of the remainder to spend on debt repayment.
4. Do the math: Use a debt consolidation calculator to check whether a personal loan is cost-effective. Make sure the monthly payment is lower than your repayment budget. If not, you may have to increase the loan term.

If your research shows savings, that's great! Proceed to the next 3 steps. If not, you may want to consider an alternative from the next section.

1. Apply for a personal loan: Read the eligibility requirements for the best personal loans and apply selectively to minimize the impact on your credit score. Be honest with potential lenders about why you need a loan.
2. Pay off your credit cards: You can also ask your lender to pay your credit card issuers on your behalf.
3. Repay your debt: Put your new monthly payment due date on your calendar or smartphone and stick to your repayment budget. With a solid plan, you'll soon be debt-free.

Personal loan alternatives

If you'd rather not take out a personal loan to pay off your credit card, balance transfer credit cards, consumer proposals, or even a basic debt management plan can help.

Here are other viable options:

• Balance transfer credit card: You can take out a balance transfer credit card with a card issuer that's different from your current credit card. Then, use the new balance to pay off your existing balance at a much lower interest rate.
• Line of credit: If you can secure a personal line of credit with an interest rate lower than your credit card's, you can take it out and use it to repay the card. Then, pay off the line of credit and save a little on the interest.
• Consumer proposal: If you're struggling with your finances, you might choose the legal settlement option, which declares you insolvent. You'll repay a portion of your debt, get a longer repayment term, or both.
• Home equity loan: This riskier option uses your home as equity for the loan. While that helps you secure funds, you could lose your home if you fail to repay the loan.
• Withdraw from RRSP: You can take retirement funds from your RRSP as long as they're not locked-in. Keep in mind that you'll have to work hard to restore the funds that you'll need for retirement.
• Debt management plan: For more support, ask a non-profit credit counselling agency or Licensed Insolvency Trustee (LIT) to help you create a debt management plan or consumer proposal, respectively.

Due to predatory interest rates, you should avoid taking out a payday loan.

FAQ

What is a personal loan?

A personal loan is a loan made directly to you – not to a business – and can be used for debt consolidation, to make a purchase like a car, to pay for a home or renovation, or just about anything you choose. The loan is repaid in monthly installments.

Is it recommended to get a personal loan to pay off credit card debt?

This isn't necessarily recommended, but it's not advised against, either. It's very much a personal choice. However, it's highly recommended that you choose a loan with an interest rate that's significantly lower than your card's rate, and that you have a good repayment strategy in place for your personal loan.

Is using a personal loan to pay off credit cards a bad idea?

Using a personal loan to pay off credit card debt isn't always a bad idea, but it isn't the best choice if you're stuck with a high interest rate and/or continue to use your credit cards. If your credit card balance exceeds the loan amount, you'll still be stuck with debt.

Can you tell me how to get rid of $30,000 credit card debt?

In this case, it's important to stop charging the card and take an honest look at your spending habits. At the same time, look for ways to steadily pay off the existing debt. Depending on your personal finances, this could mean taking out a personal loan or using a balance transfer credit card.

What's the best way to pay off my credit card?

There isn't one universally "best" way to pay off your credit card debt – the best strategy is the one that works for your individual financial situation. However, most financial experts agree that it's vital that you stop charging to the credit card, so you have the best chance of paying off the debt.