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Should I Get a Loan To Pay Off Debt?

You might be thinking about applying for a loan to pay off credit card debt or debt from another loan, but this isn’t always the best option. This can lead to a cycle where you are borrowing to pay off debt and it could lead to more stress and worry in the long run. But of course, this always depends on your situation and how responsible you are with finances.

 

Before getting a loan to pay off debt, you should consider the pros and cons alongside alternative options, which we will cover here.

 

Difference Between Personal Loan and Credit Card Debt

The first step to knowing whether you should get a loan to pay off debt is knowing what kind of debt you have. There isn’t one debt better than the other, but there are differences between loan debt and credit card debt. Here are some key factors for  both:

 

Personal Loans Credit Cards
Type of installment debt Type of revolving debt
Has fixed interest rates when you take out the loan Has variable interest rates that can change over time
Fixed repayment period over a certain amount of time when you apply for one Variable repayment period and no clear payoff date as it depends on when you use the card
Fees may include missing and late payments and early repayments; some lenders charge origination fees as well Credit card fees can include annual fees, usage-based fees and late payments

 

All in all, loans allow certainty, meaning you make the same payment each month for a set amount of time, allowing you to budget better until you pay it off. However, they lack flexibility, as you cannot reduce your payments if you face financial difficulties in a given month.

 

In contrast, credit cards offer flexibility by requiring minimum payment each month, with the option to pay more if needed. But this flexibility can make it hard to pay off debt if you don’t stick to a payment plan or use your card more. Making only the minimum can also hurt your credit score if you have a high account balance.

 

How Debt Affects Credit Score

Loans and credit card debt also impact your credit score differently, as having a high credit debt can be worse for your score than having debt from a loan. This is because with a loan, your current balance compared to your original balance is a scoring factor, and with a credit card, it’s all about how much of your credit limit you are using.

 

No matter what debt you have, it’s key to make payments on time as these will help your credit score, whereas missing them can harm it.

 

Should I Get A Loan to Pay Off Debt from A Loan?

If you have personal loan debt and can’t afford to pay it every month and are considering taking out another loan to pay it off, there are some things to know. Not only is it more likely to cause issues down the line and a continuous debt cycle with loans, but your new loan may also be at a higher interest rate over a longer repayment period. This means that you might actually be paying more just to pay off your debt. This is because your credit score will have already been impacted by the existing loan, so having multiple loans out at once might impact it further.

 

We don’t suggest getting a loan to pay off debt from another loan in this case. However, it could be the right option if you’re struggling with high interest rates and not clearing what you owe at the selected repayment period. If you’re still considering, you should weigh up the following:

 

  • Can I pay off my loan early? If so, are there hidden fees to think about?
  • Is the interest rate of the new loan higher or lower than the debt?
  • Is the repayment amount more or less r? Can I pay off this new amount each month?
  • How long do I have to repay this new loan?

 

Ultimately you want to make sure that you’re sure about this decision, if the new loan deal is better and more manageable than the existing one, then you can get a loan to pay off your debt.

 

Should I Get A Loan to Pay Off My Credit Card Debt?

Because credit card debt can be more damaging to your credit score, paying off debt with a loan can be helpful. If you can’t manage your credit card debt and want to use a loan to consolidate it, you’ll want to consider these pros and cons:

 

Pros Cons
Personal loans may have lower interest rates than credit cards meaning you might have less to pay off and potentially save on interest Loans might come with hidden fees, such as origination fees (which can be as high as10%), interest rates or late payments, potentially causing you to borrow more than what you owe
The monthly payment on the loan might be lower than the monthly payment for credit cards Depending on your debt amount and credit score, you might not qualify for the amount you need to borrow
You’ll have fewer monthly payments on a fixed rate which might be easier to manage Having a loan to pay off debt can lead to more debt if you can’t manage your finances responsibly

 

Overall, using a loan to pay off credit card debt can be a good idea if you weigh up the interest rate, monthly payments, and any hidden fees. If you can find a good deal and are happy with it, then it can be a good option. Just be sure not to end up in more debt by constantly borrowing to pay off debt.

 

How to Pay Off Debt Without A Loan?

If you aren’t sure if a loan to pay off your debt is the right decision for you, there are alternative ways to pay off your debt. These include:

  1. Debt repayment strategy: This uses any extra money you have on your credit cards to focus on paying off one card at a time. The snowball approach pays off the lowest balance first, whereas the avalanche approach pays off the highest interest rate first.
  2. Balance transfer: This allows you to move debt between credit cards and you can take out a second one to help consolidate debt with low or 0% interest fees.
  3. Debt management plan: Some nonprofit credit counsellors can help you set up a plan to negotiate fee waivers and lower interest rates to help you save money and help you pay off debt faster.
  4. Use a different type of loan to pay off debt: You could open a line of credit or use a secured loan instead of a personal loan to pay off credit cards as it may be easier to get larger amounts that way. But be careful of the collateral in case you can’t pay it off.

 

Related: Types of Loans

 

The best option for you will depend on your financial situation and personal preference. If you weigh up the pros and cons and find a solution that is better for you than your current debt situation, whether that’s seeking help or borrowing more, all that matters is that you’re happy and you know your option is better and more manageable for you.

 

Debt Consolidation Loans at Sunny

If you think getting a loan is the best way to pay off debt, a good way to estimate your interest rate, payment period, and the amount you need is to use a loan calculator. Apply online today with us to estimate your loan amount. This will involve a soft credit check, which doesn’t harm your score. If you want to proceed and take the debt consolation loan out, then you can continue the application for a hard credit check.

 

If you need more information, check out our loan guides. For tips on being more money-savvy and budget-conscious, check out our Good Vibes blog.