How a personal loan can clear your credit card balance
A personal loan is money you borrow from a bank, credit union, or online lender and repay in fixed monthly instalments over a set period — usually two to seven years. You can use that money to pay off credit card balances in full. The advantage is that personal loans typically carry a lower interest rate than credit cards, which means you pay less in interest charges over time and can become debt-free faster.
The basic process is straightforward: you borrow the amount you owe on your cards, use that money to pay off the card balances completely, then repay the personal loan instead. Once the cards are paid off, you can close them or leave them open with a zero balance — closing them when ready can slightly lower your credit score, but keeping them open and unused helps your credit mix and available credit.
This strategy works best if your credit card interest rate is significantly higher than what you would pay on a personal loan. If you carry $8,000 across cards at 18% interest, for example, a personal loan at 10% could save you hundreds of dollars. The math changes if your credit score is low — lenders may offer you a personal loan rate that is only slightly better than your card rate, which reduces the benefit.
Key Takeaways
- Personal loans typically charge 6% to 36% interest depending on your credit score and lender, while credit cards often charge 15% to 25% or higher.
- You need to compare the total cost of the personal loan against what you would pay in credit card interest over the same timeframe to confirm you actually save money.
- Lenders will check your credit score, income, and existing debt before deciding whether to lend to you and at what rate.
- Taking out a personal loan does not automatically improve your credit — you must stop using the credit cards and make on-time payments on the loan to see your score recover.
What interest rate you can expect on a personal loan
Personal loan interest rates vary widely based on your credit score, income, employment history, and the lender you choose. Banks typically offer rates between 6% and 18% for borrowers with good to excellent credit. Credit unions often offer slightly lower rates to their members. Online lenders have a wider range — from 6% to 36% — and may approve borrowers with lower credit scores, but at higher rates.
Your credit score is the single largest factor. A score above 700 usually qualifies you for rates in the 8% to 15% range. A score between 600 and 700 may bring rates of 15% to 25%. Below 600, you may face rates above 25%, which can make a personal loan less attractive than staying with credit cards, especially if you can pay down the cards within a year or two.
Before you explore, check what rate you might receive by using a lender's pre-qualification tool — this gives you an estimate without a hard credit inquiry that would lower your score. Compare offers from at least three lenders: a traditional bank, a credit union if you are a member, and one or two online lenders. The difference between a 12% rate and a 16% rate on a $10,000 loan over five years is roughly $2,400 in total interest paid.
How to calculate whether a personal loan actually saves you money
Do not assume a personal loan is cheaper just because the rate looks lower. You need to calculate the total amount you will pay under both scenarios — staying with credit cards versus taking the loan.
Start by listing each credit card balance, its interest rate, and the minimum monthly payment. Use an online credit card payoff calculator to estimate how long it would take to pay off each card if you made only minimum payments, and how much total interest you would pay. Most people find this number is shockingly high — a $5,000 balance at 20% interest with $100 monthly payments takes over five years and costs roughly $2,000 in interest alone.
Next, get a personal loan quote. Note the loan amount (the total of all card balances), the interest rate offered, the loan term (usually 36, 48, or 60 months), and the monthly payment. Use the lender's calculator or a standard loan calculator to find the total interest you would pay over the full term. Compare that number to the credit card interest you calculated above. If the personal loan total is lower, you save money. If it is higher or only slightly lower, the loan may not be worth it.
Also factor in any fees. Some personal loans charge an origination fee (typically 1% to 6% of the loan amount), which is deducted from the money you receive or added to the loan balance. A $10,000 loan with a 3% origination fee costs you $300 upfront or increases your loan balance to $10,300. Ask the lender for the total cost of the loan, including all fees, so you can compare apples to apples.
Steps to explore for a personal loan
Most personal loans can be requested online or in person, depending on the lender. The process typically takes one to three business days from process to funding.
Gather your documents first. Lenders will ask for proof of income (recent pay stubs or tax returns), proof of employment (a letter from your employer or recent bank statements showing regular deposits), and identification (a driver's license or passport). Have your Social Security number ready. You will also need to list your existing debts — credit cards, car loans, student loans, and any other monthly payments — so the lender can calculate your debt-to-income ratio.
Choose your lender and explore. Visit the lender's website or branch and complete the process. You will be asked for personal information, employment details, income, and the purpose of the loan (debt consolidation). At this stage, the lender performs a hard credit inquiry, which temporarily lowers your credit score by a few points. This is normal and expected.
Review the loan offer. If approved, the lender will send you a loan agreement showing the loan amount, interest rate, monthly payment, loan term, and any fees. Read this carefully. You have the right to decline and shop elsewhere — do not feel pressured to accept the first offer.
Sign and fund the loan. Once you accept, sign the agreement (online or in person). The lender will deposit the money into your bank account within one to three business days. Some lenders can send the money directly to your credit card issuers to pay off the balances, which prevents you from being tempted to spend the money elsewhere.
What to do with your credit cards after paying them off
Once your credit card balances are paid to zero, you face a choice: close the cards or keep them open. Closing them when ready feels like progress, but it can actually hurt your credit score temporarily. Here is why: your credit score partly depends on your credit utilization ratio — the amount of credit you are using divided by the total credit available to you. Closing cards reduces your available credit, which raises your utilization ratio even though your balances are zero.
A better approach is to keep the cards open but stop using them. Leave them in a drawer or a safe place. After six months to a year of on-time personal loan payments and zero card balances, your credit score will begin to recover and improve. Once your score has stabilized, you can close the cards if you wish — the damage will be minimal at that point.
If you are worried about the temptation to run up the cards again, ask the card issuer to lower your credit limit or freeze the account. Some people cut up the physical card but keep the account open, which prevents new charges but preserves the credit history and available credit.
When a personal loan is not the right choice
A personal loan makes sense if your credit card interest rate is substantially higher than the personal loan rate and you are committed to not running up the cards again. It does not make sense in a few situations.
If your credit score is very low (below 580), you may not be approved for a personal loan at all, or the rate offered may be so high that it is barely better than your credit card rate. In that case, focus on paying down the cards directly, even if it takes longer. If you can pay off your credit card debt within one to two years by making larger monthly payments, a personal loan may not save enough money to justify the process and the hard credit inquiry.
If you have a pattern of running up credit card balances, a personal loan is a temporary fix, not a solution. The underlying spending behavior has to change, or you will end up with both a personal loan payment and new credit card debt. In this situation, consider working with a nonprofit credit counselor (through the National Foundation for Credit Counseling or a similar organization) to create a budget and spending plan before taking on new debt.
Personal loans versus other debt consolidation options
A personal loan is one way to consolidate credit card debt, but it is not the only way. Understanding the alternatives helps you choose the right tool for your situation.
Balance transfer credit card. Some credit cards offer a 0% introductory interest rate on balances transferred from other cards, usually for 6 to 21 months. If you transfer a $5,000 balance to a 0% card for 12 months, you pay no interest during that period — but only if you make no new charges and pay off the balance before the promotional rate ends. After the promotion expires, the rate jumps to the card's regular rate (often 18% or higher). Balance transfers also charge a fee, typically 3% to 5% of the amount transferred. This option works if you can pay off the balance within the promotional period and have the discipline not to use the card for new purchases.
Home equity loan or line of credit. If you own a home, you can borrow against the equity (the difference between what your home is worth and what you owe on the mortgage). These loans typically carry lower interest rates than personal loans because the home serves as collateral. However, if you fail to repay, the lender can foreclose on your home. This is a high-risk option and should only be considered if you are certain you can make the payments.
Debt management plan through a credit counselor. A nonprofit credit counselor can negotiate with your credit card issuers to lower your interest rates and create a repayment plan. You make one monthly payment to the counseling agency, which distributes it to your creditors. This does not involve borrowing new money, but it does require you to close the credit cards and may affect your credit score. It is a good option if you cannot may have access to for a personal loan or a balance transfer card.
Frequently Asked Questions
Will taking out a personal loan hurt my credit score?
Yes, initially. The hard credit inquiry lowers your score by a few points, and opening a new account temporarily reduces your average account age. However, if you make on-time payments on the personal loan and pay off the credit cards completely, your score will recover and improve within six to twelve months. The long-term benefit of lower debt and a lower utilization ratio outweighs the short-term dip.
Can I use a personal loan to pay off credit cards if I am still paying off other debts?
Yes, but the lender will factor your existing debts into their decision. They calculate your debt-to-income ratio — your total monthly debt payments divided by your gross monthly income. If this ratio is too high (usually above 43%), the lender may deny you or offer a smaller loan amount. If you are approved, make sure the personal loan payment plus your other payments still fit comfortably in your budget.
What happens if I cannot make the personal loan payment?
Contact the lender when ready. Many lenders offer hardship programs that allow you to temporarily lower or pause payments if you lose your job or face a financial emergency. Missing payments will damage your credit score and may result in the lender pursuing collection action. It is better to communicate early than to ignore the problem.
Should I pay off the personal loan early if I get extra money?
Check your loan agreement for prepayment penalties — some lenders charge a fee if you pay off the loan before the term ends. If there is no penalty, paying early saves you interest and gets you out of debt faster. If there is a penalty, calculate whether the interest you save by paying early exceeds the penalty. Often it does, but not always.
Can I get a personal loan if I have bad credit?
Yes, but at a higher interest rate. Online lenders and some credit unions work with borrowers who have credit scores as low as 500 to 600. However, if the rate they offer is only slightly lower than your credit card rate, or higher, a personal loan may not save you money. In that case, focus on paying down the cards directly or working with a credit counselor to negotiate lower rates with your card issuers.