Using a Personal Loan to Pay Off Credit Card Debt: A Worked Example

Using a personal loan to pay off credit card debt means you borrow one fixed amount, use it to pay the cards to zero, and then repay the loan in equal monthly payments over a set number of years. It can lower your total interest when the loan's rate, including any fee, is clearly lower than your cards' rates and you stop adding new card balances. If either of those isn't true, the math can turn against you, so this guide works through one example step by step.

How personal loan consolidation works

Personal loan consolidation is one of several ways to combine debts. If you want to see all of them side by side, this site's guide to how debt consolidation works covers them. With a personal loan, the process usually goes like this:

1. You add up the card balances you want to combine.
2. A lender looks at your credit and income and offers a rate, a term (often a few years) and sometimes an upfront fee.
3. If you accept, the money goes to you or straight to the card companies, and the cards drop to zero.
4. You now make one fixed payment each month until the loan is paid off on a set date.

The big difference from a credit card is the structure. A card's minimum payment shrinks as the balance shrinks, so debt can drag on for years. A personal loan has a fixed payment and a fixed end date, which makes it easier to plan around.

Example: the math on $10,000 of card debt

Example: Say you owe $10,000 across several cards at a 24% APR. You are offered a personal loan for credit card consolidation of $10,000 at 12% APR for 3 years (36 months). These are made up round numbers for illustration only.

• Card interest in month one: $10,000 × 24% ÷ 12 = $200.
• Loan interest in month one: $10,000 × 12% ÷ 12 = $100.
• Loan payment: a standard loan formula gives about $332 a month for 36 months.
• Total repaid on the loan: $332 × 36 = $11,952, so interest is about $11,952 − $10,000 = $1,952.
• Same $332 a month on the cards instead: at 24%, it takes about 47 months to reach zero, and you pay roughly $15,500 in total, or about $5,500 in interest.

In this example, the loan saves about $3,500 in interest and finishes almost a year sooner. But the example has no fee yet, and fees are where many real offers change. You can run your own numbers with the site's free debt consolidation calculator for your balances.

Costs and details that change the math

The headline rate isn't the whole story. Before comparing a personal loan to pay off debt with your current cards, look at these pieces:

• Origination fees. Some loans take a fee out of the money you receive. In the example, a 5% fee on $10,000 is $500, so you would get only $9,500 and still owe $500 on the cards. To clear all $10,000, you would need to borrow about $10,000 ÷ 0.95 = $10,526, which raises the payment and the interest.
• Term length. A longer term lowers the monthly payment but adds months of interest. A 5 year loan at the same rate costs more in total than a 3 year loan.
• Your rate depends on your credit. The rate you are offered may be higher than the rate in an ad. If the offered rate is close to your card rates, the savings can disappear.
• The APR, not just the rate. The APR includes required fees, so it is the better number for comparing offers. The CFPB has plain English explanations of loan costs and disclosures.
• Prepayment terms. Some loans let you pay extra with no penalty, which can shorten the loan. Check the loan agreement to the best of your ability, and ask the lender if anything is unclear.

What happens to the cards afterward

This is the part I see trip people up most often. Once the cards show a zero balance, the open credit lines are still there. If spending goes back on the cards, you end up with the loan payment and new card balances, which leaves you worse off than before.

A few things to know about the cards and your credit:

• Utilization usually drops. Moving balances from revolving cards to an installment loan lowers how much of your card limits you are using. This site's page on how credit utilization affects scores explains why that matters.
• Applying can add a hard inquiry. To the best of our knowledge, a new application usually shows a hard inquiry and a new account on your credit report, which can lower a score for a while. The CFPB explains how credit reports and scores work.
• Closing cards has tradeoffs. Closing them removes the temptation but can raise utilization on remaining cards and shorten your credit history. Keeping them open keeps the limits but keeps the temptation. People weigh this differently.

How it compares, and tools to plan it

A personal loan is not the only path. A balance transfer card can offer a low intro rate for a limited time, usually with a transfer fee, while a personal loan gives a fixed rate and a fixed end date. The guide on balance transfer versus personal loan tradeoffs walks through how the two differ. Some people skip new credit entirely and use the avalanche or snowball method on the cards they already have.

If you want a free tool, start with the site's calculators and worksheets: the debt consolidation calculator above, plus the snowball and avalanche calculators for comparing a no loan plan.

Another option, if you want everything in one place, is the site's own Clearora™ Debt Payoff Dashboard. It is an online dashboard with tabs for credit cards, balance transfers, car loans, personal loans and mortgages, and a save and load feature. The personal loan tab lets you mark a loan as paying off other debts, so you can see the cards and the loan together. It is sold with a manual, a video and a private Skool community called Get Out of Debt Club. You can read the details on the Clearora Debt Payoff Dashboard page.

FAQ

Is a personal loan to pay off credit card debt a good idea?

It depends on the numbers and your habits. It tends to save money when the loan's APR, including fees, is well below your card rates and the cards don't fill back up. If the rate is similar or new spending continues, it can cost more. Running both scenarios in a calculator shows the difference for your balances.

Does personal loan consolidation hurt your credit?

To the best of our knowledge, applying usually adds a hard inquiry and a new account, which can lower a score for a short time. Lower card utilization and on time payments can work in the other direction over time. The CFPB has general guidance on how credit scores and reports work.

What if the loan fee is taken out of the money I receive?

Then you receive less than you borrowed. With a 5% fee on $10,000, you get $9,500. To pay off a full $10,000 balance, you would need to borrow about $10,526, so include the fee when you compare total cost.

Should I close my credit cards after paying them off with a loan?

There's no single answer. Closing cards removes the temptation to spend but can raise utilization and shorten your credit history. Keeping them open preserves the limits but only helps if the balances stay at zero. It comes down to which risk is bigger for you.

More on this topic: Credit Card Debt: How Interest Works and How to Get Out · Debt Options Compared: When Is Debt Consolidation a Good Idea?