Credit card debt is carried by many Canadians and its revolving nature, compound interest rates, and ease of access can make it very difficult to eliminate. This often leads consumers to think of alternative ways to pay down their balances, including taking out a loan.
When Should You Use A Loan To Pay Off A Credit Card Balance?
Essentially, when you take out a personal loan to pay off credit card debt, you’re moving money around, not paying off debt. For this reason, it’s not always the right option to take out more debt to repay debt. Although, there are exceptions to this rule.
If You Qualify For A Lower Interest Rate
The first exception is if you can snag a lower interest rate on your personal loan. Credit card interest rates are very high, usually around 20%. If your personal loan has a lower interest rate, you’ll likely pay less for the money you borrow. Although, if you expect you can pay off your credit card debt in a shorter period of time than you would a personal loan, you might end up paying more interest with a personal loan.
If You Have Other Debt To Pay Off
The second exception is debt consolidation. If you have numerous credit cards and other unsecured debts, it can become challenging to manage them all at the same time. You can use a debt consolidation loan to repay all of the unsecured debts you’re carrying then focus on repaying the personal loan. One monthly payment is easier to manage than multiple.
If You Can’t Pay Off Your Full Balance
The third exception is if you’re struggling with payments. If you can’t meet your credit card obligations by paying off your full balance, using a loan might be an ideal option. This is especially true if your monthly payment would be lower with a loan. Missing or making partial payments can impact your credit score as well. Making the decision to use a loan to pay off credit card debt could preserve your credit.
Finally, a personal loan can help you see an end to the tunnel of debt. Credit cards are a form of revolving credit, which means it can be easy to fall back into debt after repaying what you owe. A personal loan forces you to stop using your credit card to ensure you meet your loan payments. Not only will you be less likely to use your credit card, you’ll have a set future date for when you can expect to be 100% debt free – the end of the personal loan term.
Benefits Of Using A Loan To Pay Off Your Credit Card Balance
Using a personal loan to repay credit card debts has its advantages, both financial and non-financial. A list of the benefits can be found below.
- Potential for lower interest
- One monthly payment instead of many
- The cost of the personal loan is predictable unlike credit card payments which fluctuate
- Improvement to your cash flow
- Once your personal loan is paid off, you’ll be debt-free
- Responsible management of a personal loan could increase your credit score
- Possibly lower payment amounts
What Types Of Loans Can You Use To Pay Off Your Credit Card
A personal loan can be used to pay off your credit card debt. Personal loans are installment loans which means you’ll receive a lump sum of cash when you’re approved, then be responsible for making timely, periodic payments.
You can use a secured or unsecured personal loan to repay debt. Keep in mind that unsecured loans are easier to obtain from the comfort of your home and you won’t be putting valuable assets at risk.
You can also use a line of credit or home equity line of credit (HELOC) to pay off your credit card. A line of credit is similar to a credit card in the sense that it’s revolving. However, you can withdraw cash instead of putting an amount on credit as you would with a credit card. A HELOC can be used too, but you need to own a home that has positive equity.
Alternative Ways To Pay Down Credit Card Debt
If you don’t think a personal loan is the right option for you to repay your credit card debt, you have other options. The option you choose should adequately suit your personal financial position and goals.
- Credit Counselling. Sometimes the way to eliminate credit card debt is to receive personal finance education or advice. A credit counsellor can help you create a debt repayment strategy and help you develop habits to ensure you remain debt-free in the future.
- Balance Transfer. This is a credit card that allows you to transfer a balance from another credit card. Usually, there is 0% interest for an introductory period. If you can repay the debt within the introductory period, this is an ideal option.
- Snowball Repayment Method. This is a strategy of repaying debt using savings or extra earnings. Under this method, the borrower would repay the smallest debts first, then work their way up to larger debts until they are debt-free.
- Avalanche Repayment Method. This is another strategy of repaying debt that uses savings or extra earnings. The borrower would repay debts with the highest interest rate first, then pay the less costly debt until all debt is eliminated.
- Budgeting. Debt can often be managed through a realistic budget. Write out all your income and expenses, then determine what you have leftover to put toward your credit card balance. You can also take the opportunity to reduce your expenses and earn extra income where possible.
Is it smart to pay off a credit card balance with a loan?
Can I use a personal loan to pay off my credit card?
Should I use a line of credit or a personal loan to pay off my credit card?
Becoming Debt Free With A Loan
The weight of carrying credit card debt can be both financially and mentally heavy. When considering taking out a loan to pay off your credit card balance, it’s important that you take into account both how your financial situation and how it could affect or even help your lifestyle. If using a loan to pay down your credit card balance helps you become debt-free in a manageable manner, it’s definitely an idea you should consider.
Largest Lender Network In Canada
Save time and money with Loans Canada. Research and compare lenders before you apply. Share your experiences with Canada's top lenders.
goPeer — Helping Consumers Achieve Financial Freedom by Connecting Canadians Looking For Financing With Canadians Looking to Invest
goPeer is Canada's first consumer peer to peer lending platform and connects creditworthy Canadians looking for a loan with everyday Canadians looking...