How to use a personal loan to pay off debt

Debt consolidation can streamline your finances by combining multiple debts into a single, more manageable payment, potentially reducing your overall interest rate and helping you pay off your debt faster. According to a study from 2023 by TransUnion, borrowers who used unsecured personal loans for debt consolidation saw an average 57% decrease in their credit card debt.

How to consolidate debt with a personal loan

A personal loan is a type of unsecured loan that allows you to borrow a lump sum from a financial institution, such as a bank, online lender, or credit union, and repay it in set monthly installments, usually at a fixed rate. This can make them particularly useful for debt management and consolidating high-interest debt, like on credit cards.

While loan amounts vary by lender - and how much you can qualify for depends on your credit and income, among other factors - you may be able to find loan amounts anywhere from $600 to around $200,000, in some cases. If you're approved for a personal loan, you'll typically receive the funds in one payment, often via direct deposit. You can generally expect to receive the funds as soon as the same or next business day after approval, though some lenders can take up to a week.

You can pay off your debts yourself with the loan proceeds or, the lender may send direct payments to your creditors on your behalf (a few actually offer rate discounts for this). Regardless, you'll make monthly payments with interest over a set term on the new loan, which typically ranges from one to seven years. If you can, consider setting up automatic payments to help keep you on track. Some lenders even offer rate discounts for utilizing autopay.

Example of debt consolidation

Say you're looking to pay off credit card debt with a personal loan.

You have three credit cards with the following balances, rates, monthly payments, and length of time until repaid:

After shopping around, you find a personal loan with the following terms:

• Loan amount: $10,000
• Interest rate: 17.00% APR
• Loan term: 2 years (24 months)

With these terms, your monthly payment would be roughly the same, but you'd pay a total of $1,866 in interest - that's $1,513 in savings. And, you'd be out of debt roughly a year earlier than if you stuck with minimum payments.

Consolidating debt with a personal loan tends to work best if you can save money by qualifying for a lower rate. You can use a personal loan calculator to estimate your monthly payments and total savings with a debt consolidation loan.

Compare debt consolidation rates

Pros and cons of using a personal loan to pay off debt

Pros

• Chance of a lower APR: If you have good credit - or your score has gone up -, you may qualify for a personal loan with a lower annual percentage rate than you're currently paying. The APR includes the interest rate plus any upfront fees, and represents the total cost of borrowing expressed as a percentage.
• Could tackle debt sooner: If you're facing multiple variable, high-interest debt payments each month, they could take years to pay off, without a clear end date. Since personal loans typically come with a fixed repayment term and payoff date, you could know exactly when your consolidated debts will be paid off.
• Simplified payments: If you're juggling lots of debts with varying due dates, consolidating debt with a personal loan can make it easier. If you can qualify for a loan large enough to cover your debt, you'd only have to make one payment a month instead of trying to keep track of several due dates.
• Chance to boost your credit: Making your loan payments on time, every time, is crucial to help raise your credit score over time. This can make it easier for you to lock in lower rates and more favorable terms in the future. Paying down any revolving debt, like credit cards, can also help to boost your credit by lowering your credit utilization, which is the amount of credit you're using compared to what is available. It's generally best to have a utilization rate no higher than 36%, so lowering it can impact your score significantly.

Cons

• No guarantee of a lower APR: Personal loans offer lower APRs on average than credit cards,, according to the Federal Reserve, but that is highly dependent on your credit. If you have bad credit or fair credit (a FICO score below 670), you might not be eligible for a lower APR. Personal loan APRs from reputable lenders tend to top out at 36%.
• Fees: Many lenders charge fees to personal loan borrowers. Origination fees, late fees, and insufficient funds fees are a few examples that can interfere with your savings from a lower rate. Origination fees can vary based on your credit.
• Potential for more debt: While using a personal loan to consolidate debt can help you get rid of your debt faster, or on a more manageable timeline, it can also have the opposite effect. If you start to carry a balance on your credit cards, you'll rack up more debt than you had. A personal loan won't solve an overspending problem. If you need assistance managing your finances, the National Foundation for Credit Counseling has resources that can help. Additionally, consider contacting 211, a nonprofit organization that can connect you with local resources.
• Can hurt your credit: Your credit score will take a hit when you initially take out a personal loan, but only by a few points, and temporarily. Missing payments, on the other hand, can severely hurt your score. Commit to making timely payments to keep your credit in good shape.

Check out: How to use a personal loan to pay off credit card debt

When to use a personal loan to pay off debt

You may want to consider this option if:

• You qualify for a lower APR: If you have strong credit and get approved for a personal loan with a competitive rate that is lower than on your current debts, this strategy can save you a significant amount of money.
• You can consolidate your debts into a single payment: If you're managing several debts, each with its own APR and monthly payment, it can be overwhelming. A personal loan can help you get rid of the multiple payments. You'd only have to worry about one payment a month, ideally with a lower APR.
• You want a set debt payoff timeline: Personal loans typically come with a fixed repayment schedule and payoff date.

Learn more: How does debt consolidation work?

How to apply for a personal loan to pay off debt

1. Add up your debt: Jot down all of the debts you want to pay off with a personal loan and add up their balances. This way you'll know how much to borrow. It is best practice to only borrow what you need to avoid falling into more debt.
2. Check your credit: Visit AnnualCreditReport.com and pull free copies of your credit reports. Go through each report and dispute any errors that may be bringing down your score with the appropriate bureau.
3. Shop around: After researching which lenders offer loans of an appropriate size with qualifications you meet - knowing your credit score will help here - prequalify, if possible, with at least three lenders so you can compare possible rates, terms, and fees. When you prequalify, your credit score won't be affected, since it uses a soft credit pull based on personal information such as your name, date of birth, and Social Security number. Prequalification is not an offer of credit, however, and your final rate could be different.
4. Apply: Once you zero in on the right loan for consolidating your debt, apply online or in person. Be prepared to submit documents like your government-issued ID, bank account information, and pay stubs. A formal application will result in a hard credit inquiry from your chosen lender, which will temporarily lower your score.
5. Receive loan funds: If you are approved, your lender will likely distribute your funds the same or next day, or within a few business days. Most funds are distributed via direct deposit.
6. Repay your debts: Unless the lender is sending direct payments to your creditors, it's up to you to repay. Do this as soon as possible so you're not tempted to use the money for other expenses.
7. Pay off your loan: Make your loan payments on time. Remember, even one missed payment can hurt your credit score.

Other ways to pay off debt

Debt snowball method

Best if: You want to build momentum in the payoff process

With this strategy, you prioritize the account with the lowest balance first, while making minimum payments on all your other debts. When the first balance is paid off, add the amount you put toward it each month to the next-smallest balance's payment, and so on. This can build momentum with each debt payoff and keep you motivated.

Debt avalanche method

Best if: You want to maximize interest savings without taking on new credit

The debt avalanche strategy works similarly, but prioritizes paying off the debt with the highest interest rate first. It's worth considering if you want to save as much as possible on interest, just know it could take longer to see initial results.

Balance transfer credit card

Best if: You can pay off your debt before the promotional period ends

You may be able to transfer your debt to a balance transfer credit card with a 0% introductory APR. If you're able to repay your debt before the introductory period (often 6 to 21 months) ends, you can avoid interest charges. Just keep in mind that you'll likely have to pay a balance transfer fee (3%-5% of total balance), and if you can't pay off your debt in the promotional time frame, the regular APR will apply.

Home equity-based financing

Best if: You have sufficient equity in your home - and are comfortable using it as collateral

If you own a home with built-up equity, a home equity loan or home equity line of credit (HELOC) might make sense. A home equity loan gives you a lump sum of money upfront, while a HELOC is a revolving credit line. Loan amounts for both are based in part on the equity you've built in your home. Your home serves as collateral for both, however, so if you can't make your payments, you could lose your home to foreclosure. They also tend to come with closing costs, and can take weeks to fund.

Using a personal loan to pay off debt FAQ

Where can I get a personal loan to pay off debt?

Many banks, credit unions, and online lenders offer personal loans you can use to pay off debt. Shop around to find the lowest APR and best terms for your situation.

Can I get a personal loan with bad credit?

Yes, it is possible to be approved for a personal loan if you have bad credit. But you may only qualify for APRs on the high end of a lender's range. You could consider finding a cosigner, which may help you qualify for a loan or secure a lower rate and more favorable terms. A cosigner is someone with good credit who is responsible for making payments if you don't.

You can also consider a secured loan for a lower rate. These loans are secured by collateral, like your house or car. They come with increased risk, however. If you default on your loan, the lender can seize your collateral, which is why a lower rate is typically offered.

Can I pay off my personal loan early without penalty?

If your lender doesn't charge a prepayment penalty (many don't, but always check the terms of your loan agreement for your lender's particular terms), you can repay a personal loan early without penalty. This strategy can save you money on interest.