Pros and cons of personal loans to pay off debt

(InvestigateTV) — The average interest rate for personal loans in May 2024 is around 12%, according to Bankrate, making them a tempting option for refinancing pricier credit card debt.

Nathan Grant, a senior finance industry analyst with Money Tips, said personal loans typically have lower interest rates compared to credit cards. They could help consumers with debt pay less interest and save money over time.

“Another thing is fixed repayment terms, you know, with a credit card, especially if you are still using your credit card, it’s a revolving balance. Fluctuating your minimum payments, might be changing with a personal loan,” Grant explained. “It’s consistent payment amounts each month. So, in an actually consistent timeframe. So, you could really budget and say ‘x’ amount per month for this number of months, I’m going to have it paid off by that.”

Grant said another plus is that a personal loan could help raise credit scores. Borrowers making consistent and on-time payments could see a bump.

Grant shared the biggest pitfall of using a personal loan to pay off debt is acquiring new credit card balances in the process.

“When you do something like transferring a balance to a personal loan, you don’t want to acquire new debt,” he cautioned. “On top of that, you know, it’s very tempting. And sometimes things pop up where you feel like, ‘Oh, I need to use my credit cards.’ But if it’s not something you can pay off right away when you’re using your credit card, you don’t want to use your credit card on top of the balances you start to pay off.”

Grant said another issue is that not all consumers will be approved for a personal loan. Approval hinges on credit scores.

Another consideration is that borrowers may be offered a loan with a high interest rate and monthly minimum payment. Those that cannot meet the minimum every month should be very cautious before moving forward since this could negatively impact their credit score.

Lastly, those interested should research and be aware of all the fees included with a personal loan. Make sure the total cost will, at a minimum, be lower overall than their current credit card debt loan.