Should You Move Credit Card Debt To A Personal Loan?

A credit card in your wallet can be the ideal option when you do not have any cash. However, frequently, the biggest mistake anyone can commit is considering it as a source of income. You may spend more than you can afford. A credit card's high-interest rate (which can reach 45%) further contributes to the fast growth of the outstanding balance.

If you reach such a stage, you may explore options to pay your debt off. Becoming debt-free with a personal loan is often touted as one of the best options. But should you get your credit card balance transferred to a personal loan?

When Should You Consider Taking Out A Personal Loan To Pay Your Credit Card Debt?

• When The Interest Rate Is Lower

Credit card interest rates can reach 45%, while personal loan interest rates range from 11.5-24%. In such a case, a personal loan is ideal to pay off credit card debt since the interest rate is significantly lower than that on a card.

• When You Want To Merge Multiple Credit Card Debts

You'll need to keep track of multiple payments and due dates if you have balances on two or more credit cards. As a result, consolidating numerous credit card balances with one personal loan reduces debt and the hassle associated with credit card debt.

• When You Want Flexibility In EMI And tenure

With personal loans, you can fix the repayment period according to your ability to repay the loan. Personal loans include a repayment period ranging from 1 to 5 years, unlike credit cards, where you must pay the outstanding balance in full to avoid interest payments and penalties. Moving a credit card debt to a personal loan allows you to plan your repayments accordingly.

What Must You Remember When Transferring Credit Card Debt To A Personal Loan?

• Credit Score

As personal loans are generally unsecured, lenders may likely approve people with high credit scores. Otherwise, interest rates will increase, or they may reject your loan application.

Keeping your credit card balance at a minimum is key to achieving a good credit score. If not, the delayed payment will affect your credit score. If you fail to pay your credit card debts repeatedly, your credit score declines, reducing your chances of obtaining a lower rate or even being approved for a personal loan.

• Loan Tenure

An important factor in determining your EMI is the tenure of your loan. If you choose a longer tenure, your EMI will be smaller, but you will also pay higher interest costs. For loans with shorter terms, the reverse is true. Ensure a brief loan term based on your ability to repay and your financial projections.

• Interest Rate

Personal loans work well to replace expensive credit card bills with lower-interest loans. Some credit cards, for example, charge interest rates of 40.2% p.a., while IIFL Finance charges rates between 11.75% and 34% for personal loans.

Compare the interest rates charged by different lenders before taking a loan since a difference in interest rate can significantly impact your EMIs.

• Prepayment Charges

It is common for banks to prohibit the prepayment of personal loans until after a specified period has passed. Generally, lenders charge a prepayment fee of 2% to 5% of the outstanding principal.

If you expect to generate cash flow in the future, choose a personal loan that does not carry a prepayment penalty. Thus, you can avoid additional charges when paying off any windfall receipts or bonuses.

• Returns From Existing Investments

You may be better off redeeming/exiting your existing investments and using the proceeds to pay off your credit card debt if your current assets provide a lower rate of return than the interest rate charged on your personal loan. However, don't pay off your credit card debt with your retirement savings or investments made for a specific purpose.

Should You Take Out A Loan To Pay Off Credit Card Debt?

Paying off your debt in one go is always better if you can afford it. If you cannot repay your credit card debt within a month or two, consider taking out a personal loan. Remember, personal loans are also debts that you need to repay. You must change the spending habits that have resulted in unmanageable debt.

Consolidate Your Credit Card Debts With IIFL Finance Personal Loans

You can consolidate your existing credit card debt with a personal loan from IIFL Finance and pay a single EMI each month. We offer affordable, attractive, low-interest personal loans to help you raise funds for all your needs. You can also calculate your EMI using IIFL Personal Loan Interest Rate Calculator. Now you can apply online for a personal loan and get approved instantly with IIFL Finance!

FAQs

Q1. Should you convert your credit card balance to a personal loan?
Ans. Moving credit card debt to a personal loan may be ideal if you have trouble paying your credit card payments.

Q2. Do personal loans bring your credit score down?
Ans. You may notice a slight dip in your credit score when applying for a personal loan, just as you would with any other loan, mortgage, or credit card application. As lenders analyse your credit report, your score will drop every time they pull a hard inquiry.