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Consolidate Credit Card Debt with a Personal Loan

Consolidate Credit Card Debt

Debt consolidation is the process of combining your existing debts into one new debt.

When the new debt offers a lower interest rate than your existing debts, you can save money by reducing the amount of interest paid to the lender. Because credit card debt usually carries double-digit interest rates, consolidation can provide significant interest savings over time.

The best consolidation options include balance transfers, personal loans, or secured loans. With a personal loan (also called a debt consolidation loan), you borrow a fixed amount of money for a specified period of time (usually 3-7 years). The loan can be used to eliminate existing credit card debt, leaving only the personal loan to be repaid. Personal loans are traditionally unsecured, which means that you don’t pledge any collateral on the loan.

Evaluating Debt Consolidation Loans

There are several important factors to consider before consolidating your debt using a personal loan.

Interest savings

When you obtain a personal loan to eliminate credit card debt, you can reduce the interest rate on your debt. If your existing credit card debt carries an 18% interest rate, and your personal loan offers a rate of 8%, you immediately realize a 10% interest rate reduction.

As you reduce the interest rate, you also reduce the required minimum monthly payment. For example, let’s assume that you have existing debt payments totaling $500/month. If you are approved for a personal loan, your required minimum payment might fall to $350/month over a 5-year repayment schedule. If you continue making the same $500 monthly payments, $150 will be applied to the personal loan principal, helping you get out of debt sooner.

Personal loans cannot compete with the 0% interest rate offered by balance-transfer credit cards, but most personal loans provide a longer repayment period. If you can eliminate your existing debt within 24 months, a balance transfer is hard to beat. If you need a longer repayment period, a personal loan is worth considering.

Excess fees

Traditionally, personal loan providers have charged origination fees and/or prepayment penalties, both of which you want to avoid.

An origination fee includes any upfront costs required to obtain the loan, similar to a balance-transfer fee. For example, a 5% origination fee on a $10,000 loan would cost you $500 out of pocket.

A prepayment penalty occurs when you pay off your personal loan balance ahead of schedule. For example, if you obtain a 5-year personal loan, some companies demand that you maintain the loan for the entire 5-year payment. If you pay off the balance at an earlier date, the creditor loses expected interest payments, which is why some loan providers try to charge a fee.

Your credit

When applying for a personal loan, your interest rate will depend on your creditworthiness.

To be approved for the best rates, you need to have a solid FICO credit score, and most loan providers will want to see evidence of employment, your debt-to-income ratio, and other financial metrics before approving your application. If you have poor credit, the interest rate will be much higher and the loan will be less valuable for debt consolidation.

The good news is that if you are approved, a personal loan may improve your credit score by converting credit card debt into an installment loan. SoFi (discussed below) claims an average credit score increase of 17 points.

Spending discipline

If you are approved for a new personal loan, will you use the money as intended?

The loan is meant to help you get out of debt, not increase your spending. If you can’t commit to using the loan for that purpose, you will find yourself further in debt.

Comparing Debt Consolidation Loans

In my research, I’ve identified three personal loan providers that are worth considering. Each provider will allow you to check your loan interest rate using a soft credit inquiry. A soft credit inquiry does not affect your credit score whatsoever, so there is no harm in comparison shopping when choosing a loan.

After comparing interest rates, you can select a loan provider and complete the full loan application. Only after applying will the loan provider request your complete credit profile (which could result in a hard credit inquiry).


SoFi is one of the largest online lenders with more than $20 Billion in funded loans. Personal loans are offered on a 3, 5, or 7-year repayment schedule in amounts ranging from $5,000-$100,000.

Fixed rates start at 6.99% APR. There are no origination fees or pre-payment penalties, and existing SoFi borrowers can receive an additional 0.125% rate discount for being part of the SoFi community.


Credible offers a personal loan marketplace that is completely free to use. After filling out one simple form, you receive personalized loan rates from six of the largest personal loan providers, including Avant, Lending Club, Prosper, Pave, FreedomPlus, and Upstart.

These loan providers offer rates as low as 4.99% APR, and the minimum loan amount is $1,000. The biggest downside to the Credible marketplace is that some of the lenders charge origination fees (but no prepayment penalties), whereas SoFi does not. The good news is that any origination fees are disclosed upfront in the application process.

Local Banks or Credit Unions

SoFi and Credible offer the best personal loans on the internet, but you might also consider shopping around at local financial institutions. The terms and conditions will vary by each local lender, so make sure to request detailed loan information before making a decision.

The biggest benefit to working with a local bank or credit union is flexibility. Many local lenders will work with you to find a loan solution, even if your credit is less than stellar.

Do you have experience using a personal loan to consolidate your credit card debt? Please share with a comment below.

Editorial Disclaimer: The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author’s alone.

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This is a great explanation of the pros and cons of debt consolidation. As to the previous commenter, I for one do NOT think you should withdraw from a retirement account to pay down debt. But borrowing is a different story. I guess it would depend on how stable your job is and how much you are borrowing. Remember that if you were to lose your job, the entire retirement loan would be considered a distribution.

Great info!


Do you think it’s a good idea to borrow from a retirement plan to pay off credit card debt? The idea would be to pay interest to your own retirement account, with an even lower monthly payment than a commercial loan.

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