Pros and Cons of Using A Personal Loan to Pay Off Credit Card Debt

Owning a credit card comes can allow us the freedom of spending when we want and as we want. As more and more Indians adopt the plastic money format for their daily expenses, there is an evident pile-up of credit card debt among consumers. While some may use it judiciously, others mistake credit cards to be an extension of their income and continue to spend on things that they cannot afford. 

If you have made the mistake of overspending with your credit card and are looking to clear your debt, you can use some ways to do so. One of the commonly used methods is a personal loan. Consumers often take a personal loan to settle the outstanding balance they owe to the credit card company. 

Benefits of Using Personal Loan for Credit Card Debt Clearance

Lower Interest Rates – The primary reason why a personal loan can be used for clearing credit card debt is the lower rate of interest involved. A credit card can be considered as a loan. It differs from other loans because of its usage and the fact that repayment of credit card bills is a continuous process. Credit cards involve an Annual Percentage Rate (APR) which can range between 35% – 45%. This makes the effective monthly interest rate to be in the range of 2.9% to 3.75%, which is significantly expensive.

If you consider a personal loan, the interest rates are as low as 12%. In contrast to credit cards, the effective interest rates for personal loans can range from 1% to 2.33% per month.

Single Payment Against Multiple Payments – If you own multiple credit cards and have an outstanding balance on each of them, you will end up spending a large amount every month even if you manage to make minimum payments. When you use a personal loan, you can combine multiple payments into a single payment. This will also allow you to maintain a monthly budget charting out how much you owe to the creditors and how much you have in hand. You also don’t have to worry about remembering multiple payment dates of multiple credit cards.

Sufficient Time to Clear Loan – Another benefit of sourcing a personal loan for clearing credit card debt is the amount of additional time you get to settle the debt. A credit card continues to accumulate interest once you have crossed the interest-free period. Thus, the longer you wait to clear your dues, the higher the interest charges and the more debt pile up it may result in. A personal loan comes with fixed EMIs for the tenure you choose. It also allows you sufficient time to repay the entire loan instead of worrying about a short timeline in case of credit card dues.

Better Credit Score – If you have reached a credit card debt level which is hard to clear and you are evaluating options for the same, chances are that your credit score may be impacted. However, a personal loan can help in limiting the damage to a minimum or none at all. Instead of letting your credit score get impacted severely, it makes sense to use a personal loan and keep the credit report in good health. This is, provided you make timely EMI payments towards the personal loan.

Disadvantages of Personal Loan for Credit Card Debt Payment

Disadvantages of Personal Loan for Credit Card Debt Payment

Some of the disadvantages and key aspects to keep in mind before applying for a personal loan are given below. These will help to safeguard you against some of the negative aspects of personal loans.

Beware of Lenders – Many banks and financial institutions offer personal loans but they may not be at competitive interest rates. To benefit from the interest rates offered, borrowers have to select the right lender instead of making hasty choices. Don’t borrow a personal loan as soon as you come to know of a lender. Ensure that you check out all the available options before making your decision.

Tempting Offers Which May Prove Costly – Most personal loans come with an accidental cover and other insurance options which can benefit the borrower. While these are often advertised as low-cost or no-cost, you will have to evaluate them thoroughly before choosing one. Ensure to go through the premium payment requirement and other costs that may come associated with the EMI. Choose offers which genuinely benefit you instead of costing you more.

High Interest Rates – Personal loans come with two different kinds of interest rates. These are flat interest rates or reducing the balance interest rate. Using the flat interest rate can end up costing you more. This is because it doesn’t take into account the monthly principal payments and instead requires you to pay the same amount of interest till the end of the tenure.

High Costs – All loans come with multiple charges such as processing fees, prepayments fees, late payment charges, etc. You must ensure to learn about all these costs before opting for any of these loans, especially personal loans.

Prioritising Loan Amount Offered Over Needs– Depending on your earnings, you could be offered a higher personal loan amount than what you may require. It is best to avoid the temptation of a higher number and instead, borrow the amount that you need.

Conclusion

A personal loan can help you to pay off your credit card dues faster and save on the higher interest expenses. However, this may not be your only option for repaying your dues. A credit card balance transfer, for instance, can also help in consolidating your card balances into a lump sum amount.

Make sure to weigh all available options before choosing a personal loan. If you do source one, it must come at a considerably lower interest rate to save you from the credit card debt trap. You can then make use of a personal loan for repaying your credit card dues without any delay and additional charges.