Should You Use a Personal Loan to Pay Off Credit Cards?

[Jun 4, 2009.]

 

Having too much credit card debt can be like having a noose around one’s neck. People searching for ways to pay off credit cards often turn to consolidation loans. Here are some things to consider about using personal loans to pay off credit cards.

Fixed Loan Payments

Borrowers looking for more predictability with their monthly payments may benefit from an unsecured personal loan. Having a fixed rate allows borrowers to know exactly what their payments will be each month no matter what happens. Late payments will result in late fees, however.

Credit cards generally have variable interest rates tied to the prime rate or Treasury bill rate so monthly payments can fluctuate. A borrower who is late paying on a credit card will not only be hit with late fees, but may see the interest rate shoot up. Legislation recently signed into law by President Barack Obama would keep credit card companies from raising interest rates on existing balances unless a borrower was 60 days late with a payment.

Other things to consider about personal loans versus credit cards:

• Loan payments are set up to pay down principal and interest each month, but paying only the minimum payment on a credit card won’t result in making much of a dent in the balance.


• If the balance on a credit card is small enough to pay off in six months to a year, it may make more sense to shop around for a card that offers a 0% or low-interest rate promotional period. But borrowers should remember that being late with a payment will usually result in the interest rate being increased to the default rate.


• A person having difficulty qualifying for a bank loan or credit card may be able to get a personal loan through peer-to-peer lending sites like Prosper or Lending Club. Virgin Money helps people set up a loan with family and friends.

Unsecured personal loans, like credit cards, don’t require any collateral. So lenders can’t come after a borrower’s personal property if they default on the loan.

 

About Author:

Francine L. Huff is a freelance journalist and the author of The 25-Day Money Makeover for Women. She has appeared on a variety of TV and radio shows.