A personal loan can pay off your credit cards in one lump sum, replacing multiple monthly payments with a single fixed payment
When you take out a personal loan and use it to pay your credit card balances, you're consolidating debt. The loan gives you cash to settle what you owe the card issuer. From that point forward, you make one monthly payment to the lender instead of separate payments to each card company. The main reason people do this is that personal loans typically carry lower interest rates than credit cards, which can reduce the total amount you pay over time.
This works only if the loan's interest rate is genuinely lower than your card rates. If you have a 22% credit card balance and take a personal loan at 18%, you save money. If you take a loan at 24%, you don't. The loan amount, your credit score, and the lender you choose all affect the rate you'll be offered.
Key Takeaways
- Personal loans for credit card payoff typically charge 8% to 36% interest depending on your credit score and the lender, so compare your current card rates before borrowing.
- The loan is unsecured (not backed by collateral), so approval depends on your credit score, income, and existing debt rather than an asset you own.
- You must actively pay off the cards with the loan money—the lender does not contact your card issuers or move the money automatically.
- Taking out a personal loan lowers your available credit and may temporarily reduce your credit score, even though it can improve your score over time if you stop using the cards.
How the interest rate affects your total cost
The difference between your credit card rate and your loan rate determines whether consolidation saves you money. If you owe $10,000 across cards at an average rate of 20%, and you borrow at 12% over five years, you pay less total interest than if you kept the cards. If you borrow at 28%, you pay more.
Your credit score is the primary factor lenders use to set your rate. Scores above 740 typically receive rates in the 8% to 15% range from mainstream lenders. Scores between 670 and 739 often see rates from 15% to 25%. Scores below 670 may face rates above 25%, and some lenders decline to lend at all below certain thresholds. Online lenders, credit unions, and banks all publish their rate ranges upfront, so you can check what you might may have access to for without a hard credit inquiry.
Where to borrow and what lenders look for
Banks, credit unions, and online lenders all offer personal loans. Banks typically require an existing account and may offer lower rates to customers with direct deposit. Credit unions often have lower rates than banks and may be more flexible with credit scores if you've been a member for a while. Online lenders approve faster and have fewer documentation requirements, but their rates are often higher.
All lenders examine your credit score, income, and debt-to-income ratio (the percentage of your monthly income that goes to debt payments). You'll need to provide recent pay stubs or tax returns to prove income. Some lenders verify employment by contacting your employer directly. The loan amount you can borrow ranges from $1,000 to $50,000 depending on the lender and your financial profile.
The mechanics of paying off your cards
When the loan is approved and funded, the money goes into your bank account. You then transfer it to your credit card issuers to pay down or eliminate the balances. The lender does not do this for you. Some lenders offer to send the money directly to your card companies if you provide account numbers, but this is optional and not standard.
After you've paid off the cards, you must resist the urge to run up the balances again. If you pay off a $5,000 card balance with a personal loan and then charge $5,000 back onto the card, you now owe both the personal loan and the new card balance. This is how consolidation can backfire—people reduce their card balances but don't change their spending habits, ending up with more total debt than before.
How this affects your credit score in the short and long term
Taking out a personal loan typically lowers your credit score by 5 to 10 points in the first month. This happens because the lender performs a hard inquiry and you're adding a new account to your credit history. The score dip is temporary.
Over time, your score usually recovers and improves if you make on-time payments to the personal loan and stop using the credit cards. Paying down credit card balances lowers your credit utilization ratio (the percentage of your available credit you're using), which is a major factor in your score. If you had $10,000 in available credit across cards and owed $8,000, your utilization was 80%. After paying them off with the loan, your utilization drops to 0%, which helps your score climb back up within 3 to 6 months.
Loan terms and repayment timelines
Personal loans typically run for 2 to 7 years. Shorter terms mean higher monthly payments but less total interest paid. A $10,000 loan at 15% costs roughly $217 per month over 5 years and $155 per month over 7 years. The longer loan costs more in total interest but is easier on your monthly budget.
Most personal loans have fixed interest rates and fixed monthly payments, meaning your rate and payment amount don't change for the life of the loan. Some lenders allow you to pay off the loan early without penalty, while others charge a prepayment fee. Check the loan agreement for this detail before signing. Paying early saves you interest, but only if there's no fee that wipes out the savings.
When a personal loan makes sense and when it doesn't
A personal loan is most useful when your credit card rates are significantly higher than the loan rate you're offered, and you have a plan to stop accumulating new card debt. If you're offered a 12% loan and your cards are at 22%, the math works. If you're offered 26% and your cards are at 24%, it doesn't.
A personal loan is less useful if you have very high credit card debt relative to your income, because the monthly payment on the loan may strain your budget. It's also less useful if you're planning to explore for a mortgage or car loan within the next 6 months, because the new loan will lower your credit score temporarily and increase your debt-to-income ratio, making you a riskier borrower for those larger loans.
Alternatives to consider
A balance transfer credit card moves your debt to a new card with a 0% introductory rate, usually lasting 6 to 21 months depending on the card. This works well if you can pay off the balance before the rate jumps to the regular rate (typically 18% to 25%). The downside is that balance transfer cards charge a fee upfront (usually 3% to 5% of the amount transferred) and require good credit to may have access to.
A debt management plan through a nonprofit credit counselor negotiates with your card issuers to lower your interest rates and consolidate payments into one monthly amount you pay to the counselor, who distributes it to your creditors. This doesn't require a new loan but does require you to close the cards and may affect your credit score. A home equity line of credit or home equity loan uses your house as collateral and typically offers lower rates than personal loans, but puts your home at risk if you can't repay.
Frequently Asked Questions
Will paying off my credit cards with a personal loan hurt my credit score?
Yes, initially. The hard inquiry and new account lower your score by 5 to 10 points. However, your score typically recovers within 3 to 6 months as you make on-time loan payments and your credit utilization drops. Over time, your score usually ends up higher than it was before consolidation.
Can I use a personal loan to pay off credit cards if I have bad credit?
Some lenders work with credit scores as low as 580, but rates will be higher—often 25% to 36%. At these rates, consolidation may not save you money compared to your current card rates. Credit unions and online lenders are more likely to approve lower scores than traditional banks.
What happens if I pay off my credit cards but then use them again?
You'll owe both the personal loan and the new card balances, increasing your total debt. Consolidation only works if you change your spending behavior. Many people close their cards after paying them off to prevent this, though closing cards can slightly lower your credit score by reducing available credit.
How long does it take to get approved and receive the money?
Online lenders typically fund within 1 to 3 business days after approval. Banks and credit unions may take 5 to 10 business days. The approval decision itself can come within hours for online lenders or 1 to 2 business days for traditional lenders, depending on how quickly you submit documentation.
Is there a penalty for paying off the personal loan early?
Some lenders charge a prepayment penalty, while others don't. Always check the loan agreement before signing. If there's no penalty, paying early saves you interest. If there is a penalty, calculate whether the interest saved exceeds the fee before deciding to pay early.