Two Ways to Borrow, Two Very Different Costs
A credit card is revolving debt: the balance can go up and down, the rate is usually variable and often above 20%, and there is no set end date. A personal loan is an installment loan: you borrow a fixed amount, pay a fixed amount each month for a fixed term, and the debt is gone when the term ends. Most personal loans are unsecured, meaning no collateral is required, and many carry fixed rates.
That structure is why borrowers use personal loans to consolidate card debt: they swap a high-rate revolving balance for a lower-rate loan with a clear finish line.
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The Math: $15,000 Moved from a Card to a Loan
Assume a $15,000 card balance at 22.99% APR, and compare two plans that cost you the same $494.64 a month:
| Plan | Monthly Payment | Time to Pay Off | Total Interest | Total Paid |
|---|---|---|---|---|
| Keep the card, pay $494.64 a month | $494.64 | 46 months | $7,672.87 | $22,672.87 |
| Personal loan at 11.5%, 36 months | $494.64 | 36 months | $2,807.04 | $17,807.04 |
| Difference | same | 10 months sooner | $4,865.83 less | $4,865.83 less |
Swipe sideways to see all columns. The first month alone shows the effect: interest on the card is about $287 while on the loan it is about $144, so far more of each loan payment reduces the debt.
What the Rate and the Term Do
The loan's own terms matter. For the same $15,000:
| Loan | Monthly Payment | Total Interest |
|---|---|---|
| 11.5%, 24 months | $702.60 | $1,862.51 |
| 11.5%, 36 months | $494.64 | $2,807.04 |
| 11.5%, 60 months | $329.89 | $4,793.35 |
| 8%, 36 months | $470.05 | $1,921.64 |
| 17%, 36 months | $534.79 | $4,252.47 |
A longer term lowers the payment but raises the interest: the 60-month loan costs almost $2,000 more than the 36-month one at the same rate. And the rate matters: at 17% the loan still beats a 22.99% card, but the saving shrinks. Stretching a loan to get a small payment can erase most of the advantage.
Do Not Forget the Origination Fee
Many personal loans charge an origination fee, often between about 1% and 8% of the loan, which is taken out of the money you receive. A 5% fee on a $15,000 loan is $750, so you receive $14,250 but still owe $15,000 plus interest. That makes the real cost of the 11.5% loan about 15.1% a year.
| Loan at 11.5%, 36 Months | Cash You Receive | Total Cost | Interest Plus Fee |
|---|---|---|---|
| No origination fee | $15,000 | $17,807.04 | $2,807.04 |
| 5% origination fee | $14,250 | $18,557.04 | $3,557.04 |
Even with the fee, the loan is still about $4,116 cheaper than the card ($22,672.87 vs. $18,557.04). But the fee is why you should compare offers by APR, which includes it, and not just by the stated rate. The Truth in Lending Act requires lenders to disclose the APR and the finance charge before you sign. Note that if the loan does not cover the entire balance, you also need to pay the difference to the card yourself.
When Consolidation Is a Good Idea
- The loan APR is clearly below your card rates. A gap of several points matters; a gap of one or two may not cover the fee.
- You will not run up the cards again. Consolidation clears the balances, but it does not change spending habits. Borrowers who then use the cards again can end up with both the loan and new card debt.
- You want a fixed end date and a fixed payment. Many people find a set 36-month plan easier to stick with than a card balance that never seems to shrink.
- Your credit is good enough to qualify for a low rate. Rates depend heavily on your credit score and income.
When It Is Not
- Your credit is weak and the loans you qualify for charge about as much as your cards.
- You are close to paying the cards off. The fee and a new loan are not worth it for a small remaining balance.
- You are already struggling to pay. A loan only restructures the debt. A nonprofit credit counselor, such as one affiliated with the National Foundation for Credit Counseling, can help you build a plan or a debt management program.
Other Options to Compare
- 0% balance transfer card. The best deal if you can repay the balance within the promotional period. There is usually a transfer fee of about 3% to 5%, and the rate jumps afterward. See our guide on how credit card interest works before you decide.
- Home equity loan or line of credit. Rates are usually lower, but the loan is secured by your home, so you risk losing it if you cannot pay. Be cautious with this option.
- Pay down the cards directly with a method such as the avalanche or snowball. Our guide to paying off $10,000 of credit card debt compares them with real numbers.
How a Consolidation Loan Affects Your Credit
- Applying triggers a hard inquiry, which can lower your score by a few points for a short time. Several loan inquiries within a short shopping period are generally treated as one.
- Paying off the cards lowers your credit utilization, which often helps your score.
- A new account reduces the average age of your credit slightly.
- Closing the old cards can raise your utilization again and shorten your history, so many people keep them open and unused.
Watch for Scams
Be careful with lenders that ask for an upfront fee before approving the loan, guarantee approval regardless of credit, or pressure you to decide immediately. Legitimate lenders deduct fees from the loan proceeds and disclose the APR first. If something sounds too good to be true, check the lender's license with your state regulator.
Frequently Asked Questions
Is a personal loan better than a credit card?
For paying off a balance over time, usually yes, if the personal loan's APR is lower. For short-term purchases you repay quickly, a credit card with a grace period costs nothing in interest.
What credit score do I need for a good personal loan rate?
There is no fixed cutoff, but the best rates generally go to borrowers with good to excellent credit. Many lenders let you check a rate with a soft inquiry that does not affect your score.
Can I use a personal loan to pay off credit cards?
Yes. Some lenders even send the money directly to your card issuers. Confirm that the cards are paid and that balances are zero afterward.
How much does a personal loan cost compared with my card?
Calculate both with the same payment, as in the table above: the total interest and the payoff time show the difference. Include any origination fee.
Should I consolidate or use a balance transfer?
If you can pay the balance off before the 0% period ends, a transfer is usually cheaper. If you need more time or a fixed payment, a personal loan can be the better fit.
Conclusion & Recommended Next Steps
A personal loan is a strong tool for card debt when its APR, after fees, is clearly below your card rates and you commit to not using the cards again. Compare your actual numbers: balance, card APR, the loan's APR and any fee. Use the calculators to see both plans side by side before you apply.
Personal Loan Calculator
Estimate your monthly payment and the total cost of a loan.
Credit Card Payoff Calculator
See how long a card takes to pay off at your payment.
Credit Card Interest Calculator
See what your balance costs in interest each month.
Loan Calculator
Model extra payments and fees on any loan.
Disclaimer: This guide is intended solely for educational and informational purposes and does not constitute personalized financial, investment, legal, or tax advice. Interest rates, fees and approval depend on your credit and the lender and change over time, and the figures above are illustrations based on the stated assumptions. Compare written offers and consider speaking with a nonprofit credit counselor before you consolidate debt.