Should you pay off your credit card debt with a personal loan? There has always been a personal loan vs. credit cards debate but you should make an informed decision.
Personal loan vs. credit cards has always been a matter of debate when it comes to the best financing solutions for needs like funding weddings, higher education, medical emergencies, buying household items, going on vacations and so on. However, what happens when you have racked up high credit card debts? Should you take a personal loan to pay off the same? This is something that merits a careful examination of all the pros and cons involved.
Credit cards are now giving people the opportunity to spend without having funds at their disposal. However, people often consider credit cards to be natural extensions of their monthly incomes and keep spending on essentials and entertainment alike. Sometimes, they spend more than what they can repay with their present incomes. The outstanding balance keeps growing at a huge rate on account of the interest that is levied on credit card debt which is anyway higher than regular loans. Personal loans are often considered as the best strategies for paying off credit card debt.
Why you should consider personal loans for paying off credit card debt.
While you work out how to apply for a personal loan, here are some advantages that you must consider-
Low Rates of Interest- The biggest advantage that you get is that personal loan interest rates are mostly lower than interest rates that are charged by credit cards. Interest rates on credit card outstanding amounts can go up to a whopping 45% even! Personal loans usually come with interest rates between 12-16% on an average.
Easier to Apply and Obtain- There are minimal personal loan documents that are required and these loans do not require any collateral or guarantee. All you are assessed on is your monthly salary, your employment proof, KYC documents and so on. You can always use a personal loan EMI calculator to work out your approximate EMI and in most cases it will be way lower than your credit card repayments.
Easier to Track and Manage Repayment– With outstanding balances on multiple credit cards, you will always have to keep track of outstanding payment amounts and due dates for monthly EMIs. With a single personal loan for paying off credit card debt, you have to put up with a single date and outstanding amount.
Flexible EMI and Tenure Selection– Personal loans allow you to fix a tenure based on your own repayment capacity and this can be between 1-5 years in most cases. The outstanding balance on a credit card has to be repaid in one go for bypassing penalties and interest charges. The personal loan repayment does not have these bindings. You can plan your repayment and EMIs as per your own convenience.
Credit Score Implications- Personal loans are unsecured loans and are approved more easily. Lenders approve loans instantly to people with high credit scores. Otherwise, they charge higher rates of interest or reject the application altogether. You will have to ensure that you keep paying the minimum amount due for your credit card. Otherwise, it will become a delayed payment in the records and will affect your credit score.
Some other things to keep in mind
Prepayment Charges- Many financial institutions have a minimum lock-in period when you cannot prepay your personal loan. There are prepayment charges offered by some other lender which ranges between 2-5% of the principal in most cases. Choose a personal loan with low prepayment charges if you expect an influx of cash in the future.
Returns on Your Own Investments- In case your existing investments are offering lower rates of returns as compared to interest rates on your personal loans, you can redeem these investments and use the surplus to pay off credit card debt. However, do not use emergency funds or investments created for particular financial goals to pay off debts on your credit card.