How a personal loan can consolidate your credit card balances
A personal loan is money you borrow from a bank, credit union, or online lender and repay in fixed monthly installments over a set period — usually two to seven years. You can use that money to pay off one or more credit cards in full, leaving you with a single loan payment instead of multiple card payments.
The main reason people do this is interest rate. Credit cards typically charge 18% to 25% annual interest, while personal loans often range from 6% to 36% depending on your credit score and the lender. If your credit score qualifies you for a loan rate lower than your card rates, you pay less interest overall. Even a few percentage points lower can save hundreds of dollars over the life of the loan.
A second reason is simplicity. Instead of tracking due dates and minimum payments across three or four cards, you make one payment each month. This makes it harder to miss a payment and damage your credit further.
Key Takeaways
- Personal loans typically charge 6% to 36% interest, which may be lower than your credit card rates of 18% to 25%.
- You borrow a lump sum, use it to pay off your cards completely, then repay the loan in fixed monthly payments over two to seven years.
- Your credit score, income, and existing debt determine which lenders will work with you and what rate you receive.
- Paying off cards with a loan only saves money if you stop using those cards again — otherwise you end up with both the loan and new card debt.
- Banks, credit unions, and online lenders all offer personal loans, and rates vary widely even for the same borrower, so comparing offers matters.
What your credit score determines about loan offers
Your credit score is the first filter. Lenders pull your score from Equifax, Experian, or TransUnion and use it to decide whether to lend to you and at what rate. A score of 700 or higher typically opens access to rates in the 6% to 15% range. A score between 600 and 699 usually means rates of 15% to 25%. Below 600, many mainstream lenders decline, though some online lenders will still work with you at rates of 25% to 36%.
Your debt-to-income ratio matters equally. This is the percentage of your monthly income that goes to debt payments. If you earn $4,000 a month and pay $1,000 toward existing debts, your ratio is 25%. Most lenders want to see this below 40% to 50%. If you already carry high balances on multiple cards, adding a new loan payment can push you over that threshold and cause lenders to decline.
Your income and employment history come next. Lenders want to see steady income — either W-2 employment for at least two years, or self-employment income documented on tax returns. If you recently changed jobs or have gaps in employment, some lenders will still work with you, but you may face higher rates or smaller loan amounts.
How to find and compare personal loan offers
Start by checking your own bank or credit union first. They already have your account history and may offer better rates to existing customers. Call or visit their website and ask about personal loans for debt consolidation. Many credit unions offer rates as low as 6% to 10% if you have been a member for at least a few months.
Next, use online marketplaces that let you compare multiple lenders at once. LendingClub, Upstart, SoFi, and Prosper are common platforms where you enter your information once and receive offers from several lenders. Each offer shows the interest rate, monthly payment, and loan term. This takes 10 to 15 minutes and does not hurt your credit score — these are "soft inquiries" that lenders use to pre-may have access to you.
When you receive offers, compare the total amount you will pay back, not just the monthly payment. A lower monthly payment sometimes means a longer loan term, which means more interest overall. Use the lender's loan calculator or ask them directly: "If I borrow $10,000 at this rate for this term, what is my total interest cost?" Compare that number across offers.
Read the fine print for fees. Some lenders charge an origination fee (1% to 8% of the loan amount, deducted upfront), a prepayment penalty (a fee if you pay off early), or both. Others charge neither. A loan with a slightly higher interest rate but no origination fee can cost less overall than one with a lower rate and a 5% origination fee.
The step-by-step process after you choose a lender
Once you have selected a lender and accepted an offer, the lender will ask for documentation. Bring recent pay stubs (usually the last two months), a recent tax return or W-2, and a government-issued ID. If you are self-employed, bring two years of tax returns and possibly a profit-and-loss statement. The lender verifies your income and pulls your full credit report (a "hard inquiry" that does affect your score slightly).
This verification step usually takes three to five business days. The lender then sends you a loan agreement to sign. Read it carefully — it states the loan amount, interest rate, monthly payment, number of payments, and any fees. Sign and return it electronically or in person.
After you sign, the lender deposits the loan funds into your bank account. This can happen the same day or within one to three business days, depending on the lender. You now have the money and must decide how to use it: pay off cards in full, or pay down the highest-rate cards first and leave others open.
The safest approach is to pay off each card completely and then close it or stop using it. Call each credit card company, give them the loan funds, and ask for written confirmation that the balance is zero. Keep that confirmation. Do not use those cards again — if you do, you will end up with both the loan payment and new card debt.
Why this strategy can backfire if you don't change your spending
The biggest risk is that you pay off your cards with the loan, then run up the same balances again. Now you have a $10,000 personal loan payment plus $8,000 in new credit card debt. You are worse off than before because you have two debts instead of one.
To prevent this, you need a plan for the cards after you pay them off. Some people close the cards entirely — call the card company and ask them to close the account. This removes the temptation to use them again. The downside is that closing cards can lower your credit score slightly because it reduces your total available credit.
Others keep the cards open but put them away physically — in a drawer at home, not in your wallet. This preserves your available credit (which helps your score) while making it harder to use them impulsively. The discipline has to come from you, not the card or the lender.
When a personal loan makes sense versus when it doesn't
A personal loan makes sense if: your credit score qualifies you for a rate lower than your card rates, you have a plan to stop using the cards after you pay them off, your monthly loan payment fits comfortably in your budget, and you have stable income to make payments for the next few years.
A personal loan does not make sense if: your credit score is so low that loan rates are nearly as high as your card rates (in which case you save little or nothing), you have a history of overspending and cannot commit to not using the cards again, your income is unstable or about to change, or you are already struggling to make minimum payments (a loan just delays the problem).
In the last case, you may want to explore other options: negotiating directly with credit card companies for lower rates, working with a nonprofit credit counselor (not a for-profit debt settlement company), or in severe cases, bankruptcy. These are separate conversations, but a personal loan is not a fix if you cannot afford your current payments.
How personal loans affect your credit score
When you explore for a personal loan, the lender pulls your credit report. This hard inquiry lowers your score by a few points — usually five to ten points — and stays on your report for 12 months. If you explore to multiple lenders within a short window (a few days to two weeks), the inquiries count as one inquiry for scoring purposes, so explore to several lenders at once rather than spacing them out.
Once you receive the loan and begin making payments, your score usually recovers and then improves. This is because you now have a mix of credit types (installment loan plus revolving credit), and you are making on-time payments. Over six to 12 months, your score typically rises.
However, if you pay off your credit cards and then run up new balances, your score will drop again because your credit utilization (the percentage of available credit you are using) increases. If you had $30,000 in available credit across four cards and owed $20,000, your utilization was 67%. After paying them off, it drops to zero. If you then charge $15,000 again, it rises back to 50%. The lower your utilization, the better for your score.
Frequently Asked Questions
Can I get a personal loan if I have bad credit?
Yes, but at a higher interest rate. Lenders like Upstart, OppFi, and some online banks work with credit scores as low as 300 to 500, though rates may be 30% to 36%. In this case, a personal loan may not save you money compared to your current card rates. Check the math: if your cards charge 24% and a loan charges 32%, the loan costs more, not less.
What happens if I can't make a loan payment?
Contact the lender when ready and explain your situation. Many lenders offer hardship programs that temporarily lower or pause your payment. If you miss a payment, it damages your credit score and may trigger late fees. After 30 days late, the lender reports it to the credit bureaus. After 120 days, they may send your account to a collection agency.
Should I close my credit cards after paying them off with a loan?
Closing them removes temptation but lowers your credit score slightly. Keeping them open preserves your available credit and helps your score, but requires discipline not to use them. Either choice works if you stick to it — the key is not running up new balances while you repay the loan.
How long does it take to get a personal loan?
From process to funds in your account usually takes three to seven business days. Online lenders are often faster (same day to two days), while banks and credit unions may take five to seven days. Some lenders offer expedited funding for an extra fee.
Can I pay off a personal loan early without a penalty?
Most personal loans allow early payoff without penalty, but some charge a prepayment penalty of 1% to 5% of the remaining balance. Ask the lender before you accept the offer. If you plan to pay off the loan faster than the stated term, choose a lender with no prepayment penalty.