Money Matters

The good & bad of consolidating your debt with a personal loan

Written by

Jonathan McFadden


March 18, 2019

From earning airline miles to covering expenses your bank account can’t, using credit cards is as American as paying taxes and working too much.

It’s no surprise, then, that credit card debt nationwide is soaring. The average U.S. household has $8,284 in credit card debt, according to personal finance website WalletHub. Another site, Value Penguin, puts the number even higher at $9,333 for indebted U.S. households.

Pair that with the average 16.86 percent APR on most credit cards, and it’s clear why many borrowers feel stuck in an endless cycle of credit card debt.


But there are ways out. One of the most popular is with a personal loan. This fast and flexible financial tool lets you consolidate high-interest credit card debt and pay it off faster with a fixed monthly payment. With short terms and low rates, personal loans are an attractive option for borrowers looking for a fast way to eliminate lingering debt.


But they don’t come without risks. Here’s a breakdown of the benefits and drawbacks of using a personal loan to consolidate your credit card debt.

What’s so good about a personal loan?

Sounds weird, doesn’t it? Using a loan to eliminate debt. But in a world of complex financial instruments, personal loans are an anomaly in that they’re easy to understand and pretty straightforward. Here’s why you might want to use one to consolidate your debt.

Easily transferable 

Let’s say you owe $5,000 across three credit cards that carry a balance month-to-month. You’re struggling to make payments on time and keep track of how much you owe on what card. Worse, the longer you keep those balances, the more they accrue interest. A personal loan lets you lump all that debt together and plop it in one place, making your debt load much easier to handle.

Rates can be lower

Rates on personal loans typically are lower than what you find with most credit cards. That’s when consolidation is most beneficial because you can repay the debt with less interest and lower payments.

Fixed rates equal fixed payments

Personal loan rates are fixed. That means that no matter what happens with the economy, your personal loan rate never changes. That also means your monthly payment stays the same over the life of the loan.  

No collateral necessary

Personal loans don’t require you to put up any collateral to borrow the money. None of your personal property is at risk, which means lenders can’t seize your house or car if you default on the loan.

As for the risks…

Credit score requirements can be steep  

Most lenders agree that if you want the best rates on personal loans, your credit score should be 740 or higher. That doesn’t mean you can’t get a personal loan with less-than-excellent credit. Some lenders may be willing to lend you a personal loan if a family member, spouse or significant other agrees to co-sign on the loan.

Rates could be high. Real high.

Personal loan rates aren’t always lower than credit card APRs. Some could be as low as 5 percent; others could be as high as 28 percent. It all depends on your credit. Because personal loans don’t require collateral, they require borrowers to pay more in interest so they can still make somemoney off the loan. For borrowers with low or poor credit, that somecan be pretty substantial.

Prepayment penalties. Yep, that’s a thing.

As twisted as it sounds, some lenders will charge you a fee if you pay off your personal loan early. That’s because a faster loan payoff shortchanges the lender of any future money it would have made off interest payments. Apparently, that can’t go unpunished. The good news is that most lenders nowadays don’t charge prepayment penalties. Just make sure you ask about them when you start loan shopping.

Remember, it’s still a loan

Consolidating your debt with a personal loan doesn’t mean it’s gone. You’ve simply moved it. You still have to pay off the personal loan, which is another type of debt on your credit report. Like with any other loan, failure to make on-time payments can hurt your credit score, put a negative mark on your credit report and, in extreme situations, result in the lender taking legal action against you. 

The bottom line
Depending on your circumstances, the pros of consolidating debt with a personal loan can outweigh the cons. As long as you can handle your monthly payments, it could be an ideal, low-interest debt elimination solution that helps you wipe away your debt faster than you thought.
For more credit tips, check out LendingTree Academy, our free resource built to help you make the best financial decisions.