Use a Personal Loan To Consolidate Credit Card Debt?

by Reader Contributors

Using a Personal Loan to Consolidate Debt photo

Is a personal loan the best consolidation option for your credit card debt? Here are some things to consider before using a personal loan to consolidate your debts.

Dear Dollar Stretcher,
I was wondering if it’s a good idea to use a personal loan to consolidate debt, namely my credit cards.

All told, I owe Mr. Plastic about $10,000. I am thinking that it would be better to get a 2 or 3 year personal loan from my credit union at a lower rate than the 21% and fees some of my cards charge. It looks good on paper, but with this much debt I’m wondering if the banks would consider my application to start with and if there are any pitfalls I should avoid.

Is It a Good Idea To Consolidate Credit Card Debt Using a Personal Loan?

There is no “one size fits all” answer when it comes to debt consolidation. We have published a number of articles that address this issue, but it can also be helpful to hear from others who have been in your shoes to find out if a particular option worked for them or not and why. We reached out to our readers, many of whom have dealt with debt consolidation and here is what they shared. See if any of their experiences can give you some insight. And then take a look at some of these Dollar Stretcher articles:

Look for Lower Card Rates Before Consolidating

Before you go get a loan from the bank, you might try the following ideas that worked for us.

First, call the credit card companies and ask them to reduce your interest rate and waive the annual fee. Many cards will do that if you have been a good customer and make your payments on time.

Second, if the interest rates are still higher, consider doing some shopping for new credit cards. There are many cards out there that charge no annual fee and usually offer an introductory rate for 6 months of under 10%. Sometimes 0%. Get a few of these lower rate cards and transfer your current balances. Continue to move your balances around to keep the lowest interest rate possible. It takes some bookkeeping to keep track of when to transfer the balances, but it keeps the interest rate low (often lower than what you could get at the bank).
Tracy W.

Do the Math

YES! By all means. I just did some calculations and if you were to pay just the minimum on the credit cards, you would pay a total of $63,000. (That is assuming that the payoff was in 30 years which is most credit cards.) If you got a personal loan for 5 years at interest rate of around 11.5%, the total payments would be $13,000 and it would only cost you $220/mo. instead of $175/mo. on the credit cards..

One note of warning: make sure you stop using the cards when you do this. Otherwise you will have a loan and credit card debt! It is one of the pitfalls of debt consolidation if you aren’t careful.

Home Equity Loan

Are you a homeowner? A home equity loan might be a better option for you. It was for us. The interest paid on the loan is tax deductible.

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Our (Bad) Experience

We’ve been through these problems ourselves, and learned the hard way, via bankruptcy, that taking out a loan to pay off old debt is never the answer. What is the answer is to scale down one’s lifestyle dramatically.

First off, cut up the credit cards, and quit spending any money except that which is required to live each month. No shopping for clothes, etc. If you cannot make the minimum payment each month, then send a little each week. Don’t eat out. Cook in bulk and freeze. Hang laundry out to dry. Turn off lights in rooms. Bake bread.

We have no debt. We don’t use credit cards. And we’re way too old to worry about keeping up with the Jones’s. Cut up the cards. Pay cash for everything or don’t buy it. Call the credit card companies and work out a plan you can stick with. I could go on forever on how I managed to alter my lifestyle, and get way much more out of life itself, but I have to go to school and volunteer in my 5th grader’s class – a true enjoyment. Keep stretching,
Sarah S.

Like a Liquid Diet

Consolidating debts can be a lot like going on a liquid diet: you lose a lot of weight (read “debt”) very quickly, but unless you change your habits, it will come right back once you start leading a “normal” life.

I’m sure debt consolidation is a valuable tool, but unless it is used in conjunction with a balanced budget, you could easily find yourself in the same mess as before, only worse, especially since you will suddenly owe nothing to the credit card companies. Unless you can be very self-disciplined (And be honest with yourself; can you?), I’d pass this opportunity up.

Guess What…

I consolidated about 5 years ago and kept my credit cards. Guess what? I created new bills and am finding myself in horrid financial trouble. To avoid bankruptcy, I am moving to an apartment, returning one of my vehicles and trying to make some money on the side. I realized that I was not living within my means and it has caused me great heartache.

My suggestion to you is to

  1. Cut up all your credit cards and close your accounts (if you can’t do that, temporarily keep one card). At a minimum, store them away so you’re not tempted to use them.
  2. Get information on a creating and keeping a budget and stick to it.
  3. The Conquer Your Debt ebook bundle is a great help to me (I now have a debt elimination plan that is working for me).

I had less than $10,000 in credit card debt, but I looked at how I was spending money I did not really have. I wasted so much money and really, I have nothing to show for it. I find myself starting over at 27 years old, married with two children and having to move my family out of our home and into an apartment, all because I lived above my means and a consolidation loan did not help me change my spending habits. It provided temporary relief. And I still have credit card debts!
Martha R.

Try Credit Counseling

Are you planning on buying a house or making another major purchase anytime soon? If the answer is “No” or “Not in the next 3-4 years,” then I would recommend credit counseling. It’s a free service that negotiates with your creditors to lower or even eliminate (yes–to 0%) the interest rates on your cards.

They act as a consolidator in that you pay them one amount and they disperse it to your creditors for you. You can pay as much as you want above the minimum that they negotiate for you, and you can specify how much goes to each one. (You should pay the most to the highest rate card, obviously.) The reason for the home-buying question is that, once you are a client of a credit counseling service, mortgage companies look a bit unfavorably on that set-up even though you have made arrangements to pay your bills and are on time with all of them. It sends a signal that you got in over your head and might again with a mortgage.

After you’ve paid off your credit counseling agreement, it takes about 6 months to a year for your image to be un-tarnished with mortgage companies and others, but if you can deal with the wait for that, it’s definitely worth it! Some of my rates went from 21% to 9%, and some (AmEx) went to 0%!

Contact a service; it’s free, and it wouldn’t hurt to sit down with them even once. You’re under no obligation. The best part is that they help you write out a budget. Very eye-opening!
Jan in Houston

Long Range Planning

If you can afford the payments that is an excellent idea. My husband and I also fell into the evil trap of Mr. Plastic. One day I was checking out a debt program I had downloaded and was shocked at how long it would take to pay these cards off and how much they really cost when paying the minimum payments. We made out a long range plan that included extra payments on these cards and will cut the time and amount we will be paying considerably. It was enough motivation to cut them up and only keep one for emergencies.

Make Sure You’re Eligible

Amusingly enough, debt consolidation loans are a bear to get. I had wonderful credit, no late payments and a high salary when I applied for one. I was declined. Why? Because I owed too much money! Duh…. That is the reason I was applying. I had too many payments with too high an interest and wanted to consolidate them all under one payment with a lower interest.

Before you waste too much time wondering if this is the right option, apply and see if you can get the loan in the first place. The loan officer told me I had some of the best credit she had seen in a long time, but because of the large amounts I owed, I was considered a bad risk. No sense wringing your hands over the solution until you are sure that this is even an option.
Anita D.

Reviewed May 2021

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