Is it worth it to get a personal loan to pay off debt?
Is it worth it to get a personal loan to pay off debt? This is a question that many people struggling with credit card balances ask themselves. With elevated interest rates and inflation, the average American has over $6000 in credit card debt according to Experian. While using a personal loan to consolidate your accounts can be a good way to lower your monthly payments and simplify your debt repayment, it also comes with its own set of risks and considerations.
Pros of using a personal loan to pay off debt
One of the main advantages of using a personal loan to pay off credit card debt is the potential for lower interest rates. As of March 2024, the average credit card interest rate is 20.75 according to Bankrate. Personal loans typically have lower interest rates compared to credit cards, which means you could potentially save money on interest payments in the long run. Additionally, having a fixed repayment schedule with a personal loan can make it easier to budget and track your progress towards paying off your debt.
Another benefit of using a personal loan to pay off debt is the potential for a lower monthly payment. By consolidating multiple credit card balances into one loan, you may be able to reduce your monthly payment amount and free up some extra cash each month. This can be especially helpful if you are struggling to make your minimum credit card payments and are at risk of falling behind on your bills. However, there are also risks associated with using a personal loan to pay off debt.
Using a personal loan to pay off credit card debt can possibly increase your credit score when all credit cards are reported as zero balance. This lowers your credit utilization, however, that alone should not be a deciding factor.
Cons of using a personal loan to pay off debt
One of the main drawbacks is that you may end up paying more in interest over the life of the loan compared to if you had just continued making payments on your credit cards. Additionally, if you’re trying to recover from a bad credit score, you may not qualify for a favorable interest rate on a personal loan, which could negate any potential savings.
Another consideration is the temptation to run up your credit card balances again after using a personal loan to pay them off. If you are not able to change your spending habits and continue to use credit cards irresponsibly, you may find yourself in even more debt than before. It’s important to address the root cause of your debt and make necessary changes to your financial habits in order to avoid falling back into the same cycle.
Keep in mind some personal loans have origination fees. This fee can be based upon your credit and financial health.
In conclusion, whether it is worth it to get a personal loan to pay off debt depends on your individual financial situation and goals. While there are potential benefits to using a personal loan to consolidate and pay off credit card debt, it is important to weigh the pros and cons carefully and consider all of your options before making a decision. Consulting with a financial advisor or credit counselor can also help you make an informed choice that aligns with your long-term financial health.
