Using personal loans to pay off your credit card makes sense if it charges a lower APR. On average, it can help you to cut down at least 2% in the APR rate,, which can make a big difference if you add up. With a lower APR, you are paying back more principal in your monthly repayment which can help you to be acquitted in your debt a few years faster.
The interest rates for personal loans usually ranges from 10% – 20%. People with good credit score may get qualified for lower interest rate of 5% – 6%. taking a personal loan seems a good option if your credit card has high APR for example 24% and you are able to find a personal loan with just 10% APR.
Taking out a single personal loan to pay off several credit cards is like a debt consolidation. It allows you to focus on repaying a single debt with one interest rate instead of having to deal with many small credit card debts. With one repayment due date, it will be easier for you to manage the repayment and you don’t have to worry about overdraft fees anymore.
You should do some calculations when comparing the personal loan with credit card loan. You can calculate the loan payment based on a number of factors including loan balance, and loan term. Credit card debt don’t have defined loan term and you are only required to make a minimum payment. Personal loan has a loan term that last for 4 – 5 years. Personal loan may have higher monthly repayment but you are paying lesser in total due to the lower interest rate.
Consolidation of your credit card debts with a personal loan will only have a small negative impact on your credits score. Your credit score may drop slightly because the creditor will launch an inquiry on your credit report. But, this is only a small issue since you can rebuild it if you repay the personal loan on time.
When your monthly repayment is reduced, you may feel that you have some extra cash on hand and want to charge your card. You must not fall into this trap and stop charging your card while you are repaying the loan. Changing your spending habit is very important unless you want to get trapped in more debts. You should have come savings in your account as backup while repaying the personal loan.
So, having self discipline is important if you want to quickly become free from debt. On the other hand, if you cannot control your spending habits, obtaining a personal loan will not be the best solution for you to settle the credit card debt.