Ideally, no one would need to take out a loan to consolidate and pay off debt. However, in reality, sometimes borrowing money is the only way to manage overwhelming debt.

This necessity is often due to high credit card interest rates. With the average credit card APR at 20.71 percent as of July 2024, consumers end up paying substantial amounts in interest. This means that very little of their minimum payment goes toward reducing the principal balance — and that’s assuming they can stop using their credit cards altogether.

These challenges lead many people to consolidate their credit card debt with a personal loan at a lower interest rate.

Debt consolidation involves taking out a single loan to pay off multiple other debts. While it does mean exchanging one type of debt for another, this strategy can offer advantages — particularly if you qualify for a personal loan with affordable interest rates and favorable terms.

To qualify for the best personal loan interest rates and terms, you’ll typically need a FICO score of 800 or higher. However, a score of 670 or above can still get you competitive, near-average rates.

As of July 2024, personal loans come with an average APR of 12.35 percent, significantly lower than the current average credit card APR of 20.68 percent. This difference can lead to substantial interest savings.

If you’re managing multiple credit cards with their own payments and APRs, organizing a debt repayment plan can be challenging. You need to ensure you’re making and maximizing your payments each month. By using a personal loan to pay off debt, you can consolidate multiple payments into one monthly payment, ideally with a much lower APR.

Consider using a debt repayment calculator to see how much sooner you could pay off your debt with a lower interest rate.

Here’s a simple example: Imagine you have $5,000 in debt on a credit card with a 17 percent APR and $7,000 in debt on another card with a 21 percent APR. If you’re only able to put $100 towards each credit card per month, totaling $200 monthly, you’re not even covering the interest, meaning you’ll never pay off the debts. However, if you secure a personal loan for your total of $12,000 in credit card debt with a 10 percent APR, you can apply your $200 monthly payment towards the loan and start reducing your principal balance.

If you’re overwhelmed by credit card debt and spending more on payments each month than you earn, a personal loan with a lower APR and set repayment schedule could be just what you need.

By securing a lower APR and choosing a longer repayment timeline, you may be able to reduce your monthly payment on your consolidated debt. Using a debt consolidation calculator can help you determine if this option will work for you.

One major issue with credit cards is that continued use can prevent you from ever paying off your debt. Personal loans, however, come with a fixed interest rate, fixed monthly payments, and a fixed repayment schedule that ensures you know exactly when your debt will be paid off.

If you’re frustrated with making payments on your credit cards without seeing much progress, consolidating your debt with a personal loan and switching to cash or debit cards might be a better option.

Taking out a personal loan to pay off credit cards can save you money, but it’s not always the best option. Here are some signs you might want to consider a different debt consolidation method instead:

If you have a manageable amount of debt that you can comfortably pay off within 12 to 21 months, a balance-transfer credit card might be a better option than a personal loan. Many balance-transfer cards offer 0 percent APR on transferred balances for up to 21 months, though a balance transfer fee typically applies.

These fees usually range from 3 percent to 5 percent of the transferred balance. Despite this upfront cost, you could save hundreds of dollars or more on interest if you pay off your debt during the introductory period. Additionally, some balance transfer cards offer rewards and other consumer benefits, so be sure to compare different offers.

If you have a significant amount of credit card debt, your spending habits might need some improvement. Consolidating your debt won’t prevent you from accumulating more if you continue the same spending patterns.

Before attempting to consolidate your debt, consider reevaluating your financial strategy to better manage your spending. Consulting a personal finance coach or exploring various budgeting methods can be helpful. Find a strategy that works for you and develop habits to keep you out of debt in the long term. Addressing the root cause of your financial issues will be more effective than just tackling the symptoms.

If you have an overwhelming amount of debt that feels impossible to pay off, seeking help from a debt relief company or a non-profit Consumer Credit Counseling Service (CCCS) may be your best option. You might explore debt management or debt settlement plans, but be aware that not all third-party companies offering debt relief are reputable, as warned by the Federal Trade Commission (FTC).

In cases where your debt seems insurmountable, bankruptcy could be a viable option. Meeting with a CCCS counselor before making this decision can provide valuable guidance. To avoid potential scams, the FTC advises checking any agency you consider with your state Attorney General and local consumer protection agency.

Before applying for a personal loan, it’s wise to explore options from multiple sources such as banks, credit unions, and online lenders. Comparing at least three lenders ensures you secure the most favorable loan terms available to you. Understanding what lenders typically look for in applicants is equally crucial.

While specific lending criteria vary, here are key eligibility requirements to consider:

Credit Score: Your credit score reflects your history managing debt and predicts the likelihood of future defaults. Borrowers with good or excellent credit typically receive the best loan terms due to lower risk. Even if your score is lower but meets the lender’s minimum requirement, approval is possible, though with higher borrowing costs.

Debt-to-Income Ratio (DTI): Lenders assess your ability to afford monthly loan payments based on your income and existing debt obligations. They generally prefer borrowers with steady employment and verifiable income ranging from $15,000 to $50,000 or more. Your DTI ratio, which indicates how much of your income goes towards debt, helps lenders gauge your financial capacity.

Documentation requirements include proof of identity, address, employment, and income. Contact prospective lenders to understand their specific guidelines to avoid surprises.

When ready to apply, utilize each lender’s prequalification tool if available. This allows you to review loan offers, rates, and monthly payments without impacting your credit score. Moving forward with an application triggers a hard credit inquiry, causing a temporary dip in your score by a few points.

Imagine a life where you no longer worry about paying credit card bills, and instead, have the financial freedom to pursue vacations or other enjoyable activities. By prioritizing debt repayment, you can unlock additional cash each month, whether your goal is to build savings or simply have more disposable income.

While a personal loan can be a smart choice for consolidating debt, it’s essential to explore all available options and tools that may suit your financial situation.

Achieving debt freedom requires a commitment to avoid accumulating new debts you can’t afford to pay off. Regardless of the debt reduction strategy you adopt, it’s crucial to refrain from using credit cards and transition to cash or debit cards during your repayment journey.