I have $20,000 in credit card debt. I recently got an offer from a card for a personal loan. Should I take it, and what are the pros and cons for a personal loan?
— Fielding Offers
Dear Fielding,
Whether a personal loan is a good fit for you depends on a lot of factors. Consider how the credit card debt is currently impacting your finances and what you might do with a personal loan. Also consider how a loan payment would fit into your financial picture.
A personal loan can be a useful way to deal with credit card debt, because the interest rate is usually lower than that on credit cards. If you use a personal loan to repay your credit card debt, you’ll likely pay less over time.
You’ll also free up your credit card balances for more spending. That could be a pro, if you need access to that resource; or a con, if you don’t want the possibility of accruing more debt.
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One con to refinancing your credit card debt into a personal loan is that your minimum monthly payment might go up. With credit cards, a typical minimum payment is around 2% of your balance — so maybe $400? If you get a $20,000 personal loan with a three-year term, your payment would be more like $660 per month. With the latter, your debt will be eliminated at the end of three years, but with the former, you have a couple hundred dollars extra each month for other expenses.
Most importantly, though, consider the source of this loan offer before diving in. An offer that comes to you cold from a lender or creditor is usually not the best deal you can find.
If you want to use a personal loan to refinance your credit card debt or for any other purpose, shop around to find the terms that work best for you. Start with a local bank or credit union, especially anywhere you already have an account. Use a loan calculator to get an idea of what kind of term length and monthly payment might be feasible for you (an average personal loan interest rate is around 12% right now, according to Fed data).
Dana Miranda is a Certified Educator in Personal Finance® and author of YOU DON’T NEED A BUDGET. She writes Healthy Rich, a newsletter about how capitalism impacts the ways we think, teach and talk about money.
