Written by Josh McFadden | Last Updated September 11th, 2019Our goal, here at Best Company, is to provide you with honest, reliable information you need to find companies you can trust.
If you've done any research about personal loans or if you know someone who has had this type of loan (perhaps you have had one yourself), you likely know that the money from these can be used for virtually anything you want or need.
And that includes paying off debt.
Using a loan to pay off other loans or lines of credit? Sound crazy? Actually, this is quite common, and some consider it to be very wise. Let's explain.
Take, for example, a person who has accumulated some steep credit card debt. Making the minimum monthly payment will never be sufficient if you hope to pay off the card, especially considering the high interest rates. But if you were to be granted a personal loan for an amount equal to or greater than your credit card balance, you could take that money, pay off the card and then work on paying off the personal loan.
Some may wonder if this method is wise. Is paying off debt with more debt economically smart? Remember that interest rates on credit cards usually hover around 20 percent. At the same time, personal loan rates-while higher than mortgage rates-are almost always lower. Of course, if you have a poor credit score, a lender might approve a personal loan at a much higher rate. But provided you have good credit, you can expect your personal loan rate to be in the 10 percent neighborhood.
Given this scenario, it makes complete sense to pay off the high-interest credit card with a lower-interest personal loan. It doesn't take a mathematician to understand how this could save you time and money. Why not pay off a $10,000 credit card-that would otherwise take you years to pay off-with your personal loan, which you will pay off in three to five years?
One caution is that if you have particularly large credit debt-say, in the $25,000-plus range-your personal loan might not cover the full amount. Some lenders cap off personal loans at $10,000-$15,000. Also, be certain that you can indeed pay off the personal loan. It won't do you a whole lot of good to get rid of the credit card only to be strapped with a large personal loan you're incapable of managing.