The core difference: interest rates and repayment structure
A personal loan is usually cheaper than credit card debt if you have fair credit or better, because personal loans carry lower interest rates — often 6% to 36% depending on your credit score and the lender, while credit cards typically run 15% to 25% or higher. But the real advantage is the repayment structure: a personal loan has a fixed end date (usually 2 to 7 years) and a set monthly payment, while credit card debt can stretch indefinitely if you only pay minimums.
The math is straightforward. If you owe $5,000 on a credit card at 20% interest and pay $150 per month, you will pay roughly $3,000 in interest over the life of the debt. The same $5,000 borrowed as a personal loan at 12% interest over 5 years costs about $1,500 in interest. That difference matters.
However, a personal loan is not automatically better. If your credit score is very low (below 580), personal loan rates may be as high as credit card rates or higher. If you are only carrying a small balance and can pay it off in a few months, the savings may not justify the process and approval process. And if taking out a personal loan tempts you to run up the credit card again, you have straightforward added a second debt.
Key Takeaways
- Personal loans usually cost less in interest than credit cards because rates are lower and the debt has a fixed end date instead of stretching indefinitely.
- The monthly payment on a personal loan is fixed and known upfront, making it easier to budget than credit card minimums that change with your balance.
- Personal loans only make financial sense if your credit score is fair or better; if your score is very low, the rate may match or exceed what you are already paying.
- Taking out a personal loan to pay off credit cards only works if you stop using the cards afterward — otherwise you end up with both debts.
- Closing a credit card after paying it off with a personal loan can hurt your credit score in the short term, so consider keeping the account open and unused.
When the interest savings are real enough to matter
The larger your balance and the longer you plan to carry it, the more a personal loan saves you. If you owe $10,000 or more on credit cards and expect to take more than a year to pay it off, running the numbers through a loan calculator is worth your time. Most lenders publish their rates online without a hard credit pull, so you can see what you would actually pay before committing.
The savings also depend on your credit score. If your score is 700 or higher, you will see a meaningful rate difference — often 8 to 15 percentage points lower than your credit card rate. If your score is between 620 and 699, the gap narrows but a personal loan may still save money. Below 620, personal loan rates climb sharply, and you may find that a 0% balance transfer card (if you can get one) or a debt management plan through a nonprofit credit counselor makes more sense.
One often-overlooked advantage: a personal loan payment shows up on your credit report as an installment loan, which improves your credit mix. Credit cards are revolving debt. Having both types of debt on your report, in good standing, actually helps your credit score over time — as long as you do not miss payments on either one.
The risk of taking on a personal loan
The biggest risk is behavioral: you pay off the credit cards with the personal loan, then run up the credit cards again. Now you have both debts, and you are worse off than before. This happens often enough that financial counselors ask clients directly: "Will you cut up the cards, freeze them, or give them to someone else?" If the answer is no, a personal loan is not the right move.
A second risk is the process itself. Personal loans require a hard credit inquiry, which temporarily lowers your score by a few points. If you are planning to explore for a mortgage or car loan soon, taking out a personal loan now could cost you a better rate on something larger. Space out major credit applications by at least a few months.
Personal loans also have origination fees (usually 1% to 8% of the loan amount) and sometimes prepayment penalties, though many lenders have dropped those. Read the loan agreement before signing. Some lenders charge a fee if you pay off early, which defeats the purpose of consolidating debt.
How to compare a personal loan to your current credit card terms
Start by gathering three pieces of information: your current credit card balance, your current interest rate, and your current minimum monthly payment. Then visit a lender's website — banks, credit unions, and online lenders like LendingClub, Upstart, or SoFi all publish rates without requiring you to explore. Enter your loan amount and desired term (usually 3 to 7 years) and note the rate and monthly payment you are quoted.
Next, use a loan payoff calculator to compare total interest paid. Most are free and available on any major financial website. Plug in your credit card balance, rate, and current monthly payment to see how long it takes to pay off and how much interest you pay. Then plug in the personal loan rate and monthly payment to see the difference. If the personal loan saves you $500 or more, it is worth considering. If it saves you $100 or less, the hassle may not be worth it.
Do not explore for the personal loan yet. Instead, call your credit card issuer and ask if they will lower your interest rate. Many will, especially if you have been a customer for years and have not missed payments. A rate reduction of even 3 or 4 percentage points can shrink the advantage of a personal loan significantly.
What happens to your credit score when you consolidate
Taking out a personal loan will lower your score slightly in the short term because of the hard inquiry and the new account. But paying off the credit cards when ready after will raise your score because your credit utilization — the percentage of available credit you are using — drops to zero on those cards. Over 6 to 12 months, your score usually recovers and often ends up higher than before, assuming you make all payments on time.
The mistake is closing the credit card accounts after you pay them off. Closing an account reduces your total available credit, which raises your utilization ratio on any remaining cards and hurts your score. Instead, keep the accounts open and unused. Set up a small recurring charge on one of them (a streaming service, for example) and pay it off in full each month. This keeps the account active and helps your score.
Alternatives if a personal loan does not fit your situation
If your credit score is too low for a favorable personal loan rate, or if you are worried you will run up the credit cards again, consider a debt management plan through a nonprofit credit counselor. Organizations like the National Foundation for Credit Counseling (NFCC) offer free or low-cost counseling and can negotiate with your credit card issuers to lower your interest rate and set up a structured repayment plan. You make one payment to the counselor each month, and they distribute it to your creditors. This does not borrow new money, so there is no new debt.
A balance transfer card with a 0% introductory rate is another option if you have fair credit and can pay off the balance before the promotional period ends (usually 6 to 21 months). The catch is the balance transfer fee, typically 3% to 5% of the amount transferred. If you owe $5,000 and the fee is 3%, you are paying $150 upfront, but if the 0% rate saves you $500 in interest, you still come out ahead.
If you own a home, a home equity line of credit (HELOC) or home equity loan carries much lower rates than personal loans because the lender has collateral. But this puts your home at risk if you cannot pay, so it is only worth considering if you are confident in your ability to repay.
The step-by-step process if you decide to move forward
First, decide which lender to approach. Banks often have lower rates for existing customers. Credit unions typically offer competitive rates and may be more flexible with lower credit scores. Online lenders have fast approval and funding but sometimes higher fees. Get quotes from at least two or three before explore.
When you explore, have your recent pay stubs, tax returns, and bank statements ready. The lender will verify your income and pull your credit report. Approval usually takes 1 to 3 business days, and funding (the money hitting your account) takes another 1 to 5 business days depending on the lender.
Once the loan is funded, pay off the credit cards when ready. Do not wait. Then set up automatic payments on the personal loan so you never miss a payment. Missing even one payment on a personal loan damages your credit score more severely than missing a credit card payment, because installment loans are weighted more heavily in credit scoring.
Frequently Asked Questions
Will paying off my credit cards with a personal loan hurt my credit score?
It will drop slightly at first because of the hard inquiry and new account, but it usually recovers within 6 to 12 months and often ends up higher than before. The key is making all payments on time and keeping the paid-off credit card accounts open.
What if I cannot get approved for a personal loan?
If your credit score is very low or your income is unstable, lenders may decline you. In that case, a debt management plan through a nonprofit credit counselor, a balance transfer card, or asking your credit card issuer directly for a lower rate are better options.
Should I close my credit cards after I pay them off with a personal loan?
No. Closing accounts lowers your total available credit and raises your utilization ratio, which hurts your score. Keep them open and unused, or use one occasionally and pay it off in full each month.
Can I use a personal loan to pay off multiple credit cards?
Yes. You can borrow enough to pay off all of them at once. This simplifies your payments to a single monthly bill and usually saves more in interest than consolidating just one card.
What if I get a personal loan but then run up my credit cards again?
You will have both debts, and you will be in a worse position than before. Before taking out a personal loan, be honest with yourself about whether you can stop using the credit cards. If you cannot, a debt management plan or credit counseling may be a better fit.