How to Use Personal Loans to Pay Off Credit Card Debt

Credit card debt can be a heavy burden, weighing down your finances and limiting your financial freedom. At Financial Canadian, we understand the challenges of managing high-interest credit card balances.

Personal loans to pay off credit cards offer a potential solution for many Canadians struggling with debt. In this post, we’ll explore how you can use this strategy to take control of your finances and work towards a debt-free future.

What Are Personal Loans for Credit Card Debt?

Understanding Personal Loans

Personal loans serve as a powerful tool to tackle credit card debt. These loans provide a fixed amount you can use to pay off high-interest credit card balances. Unlike credit cards, personal loans come with a set repayment term and typically offer lower interest rates.

How Personal Loans Function

When you obtain a personal loan, you receive a lump sum of money. You then use this money to pay off your credit card balances. After that, you make fixed monthly payments to repay the personal loan over a set period (typically 2 to 5 years).

The average credit card APR stands at 20.12% as of June 2025. In contrast, personal loans had an average APR of 16.48% for consumers with good credit (690 to 719 credit score) as of the same date. This difference can lead to significant savings over time.

Advantages of Personal Loans Over Credit Cards

Personal loans offer several benefits compared to credit cards for debt repayment:

1. Lower interest rates: Personal loans often have lower APRs than credit cards.
2. Fixed repayment term: You know exactly when you’ll become debt-free.
3. Single monthly payment: Instead of managing multiple credit card bills, you only have one payment to handle.
4. Potential credit score improvement: A LendingTree study found that using a personal loan to pay down credit card debt can increase your credit score by an average of 29 points within one month.

Financial Impact of Personal Loans

Using a personal loan to pay off credit card debt can significantly affect your finances. For example, if you pay off $10,000 in credit card debt at 22% APR over three years, you’d pay approximately $3,749 in interest. However, if you consolidate that debt with a personal loan at 13% APR, you’d pay about $2,130 in interest – saving almost $1,619.

It’s important to note that actual savings depend on your specific situation, including your credit score, loan terms, and the amount of debt you’re consolidating. Always compare offers from multiple lenders to find the best deal.

Choosing the Right Personal Loan

When selecting a personal loan, consider the following factors:

1. Interest rate: Try to secure the lowest rate possible (your credit score plays a crucial role here).
2. Loan term: Shorter terms usually mean higher monthly payments but less interest paid overall.
3. Fees: Look out for origination fees, prepayment penalties, and late payment fees.
4. Lender reputation: Choose a reputable lender with positive customer reviews.

Now that you understand how personal loans can help with credit card debt, let’s explore the steps to use this strategy effectively.

How to Get a Personal Loan for Credit Card Debt

Assess Your Credit Card Debt

Start by collecting all your credit card statements. Add up the balances to determine your total debt. This step will help you understand how much you need to borrow. Don’t forget to include any fees or charges that might be added to your balance.

Next, calculate the total interest you currently pay across all your credit cards. This calculation will show you how much you could potentially save with a personal loan.

Check Your Credit Score

Your credit score significantly influences the interest rate you’ll qualify for. According to FICO, as of November 2024, the average credit score in Canada was 760. If your score falls below this average, you might want to improve it before applying for a loan.

You can check your credit score for free through various online platforms. Some Canadian banks also offer free credit score checks to their customers.

Compare Personal Loan Offers

Now it’s time to shop around. Look at offers from multiple lenders, including banks, credit unions, and online lenders. Pay attention to:

1. Interest rates
2. Loan terms
3. Fees (origination fees, prepayment penalties)
4. Monthly payment amounts

Use online comparison tools to streamline this process. The lowest interest rate isn’t always the best deal if it comes with high fees or unfavorable terms.

Apply for the Loan

Once you’ve found the best offer, apply. Most lenders allow you to apply online, making the process quick and convenient. You’ll typically need to provide:

1. Proof of income
2. Employment information
3. Details of your existing debts
4. Personal identification

Be honest and accurate in your application. Providing false information can lead to loan rejection or legal consequences.

Pay Off Your Credit Cards

If approved, use the loan funds to pay off your credit cards immediately. This action is essential – any delay can lead to additional interest charges on your cards.

Some lenders offer direct payment to creditors. If this option is available, consider using it to ensure the funds go directly to paying off your debts.

Stick to Your Repayment Plan

With your credit cards paid off, focus on repaying your personal loan. Set up automatic payments to ensure you never miss a due date. If possible, pay more than the minimum to reduce the overall interest you’ll pay.

The goal is to become debt-free. Avoid using your credit cards for new purchases while paying off your loan. If you must use a credit card, pay the balance in full each month.

While following these steps can help you effectively use a personal loan to tackle your credit card debt, it’s important to address the root cause of your debt. In the next section, we’ll explore potential risks and considerations to keep in mind when using personal loans for debt consolidation.

Risks and Alternatives to Personal Loans

Credit Score Implications

Personal loans can affect your credit score in multiple ways. Each loan application results in a hard inquiry on your credit report, which can lower your score temporarily. If you miss payments on your personal loan, your credit score will suffer significantly.

Hidden Costs and Interest Rates

Personal loans often include origination fees (ranging from 1% to 8% of the loan amount). For a $10,000 loan, you might pay up to $800 in fees before you start paying off your debt.

Interest rates on personal loans vary widely based on your credit score, income, and other factors. Always read the fine print and understand the total cost of the loan before signing.

The Debt Cycle Trap

One of the biggest risks of using a personal loan to pay off credit cards is falling back into debt.

To avoid this, create a strict budget and stop using your credit cards while paying off your personal loan. If you struggle with impulse spending, try cutting up your cards or freezing them in a block of ice.

Exploring Alternatives

Personal loans aren’t the only option for tackling credit card debt. Consider these alternatives:

1. Balance Transfer Credit Cards: These cards offer 0% APR on balance transfers for a promotional period (typically 12-21 months).
2. Debt Management Plans: Credit counseling agencies can help you set up a debt management plan, negotiating with creditors to lower your interest rates and consolidate your payments.
3. Home Equity Line of Credit (HELOC): If you own a home, a HELOC can offer lower interest rates than personal loans. However, you risk losing your home if you can’t make payments.
4. Debt Snowball or Avalanche Methods: These DIY approaches involve strategically paying off your debts without taking on new loans. The snowball method focuses on paying off the smallest debts first, while the avalanche method targets high-interest debts.

The best strategy depends on your individual financial situation. We recommend consulting with a financial advisor to determine the most suitable approach for your needs.

Final Thoughts

Personal loans to pay off credit cards can effectively manage high-interest debt. This strategy consolidates multiple credit card balances into a single, lower-interest loan, potentially saving money and simplifying repayment. However, you must approach this method with caution and responsibility, as personal loans still represent a form of debt.

Before deciding on this approach, evaluate your financial situation carefully. Consider alternatives like balance transfer cards or debt management plans, as each option has its own advantages and disadvantages. If you feel uncertain about the best path forward, seek professional financial advice to receive personalized guidance based on your specific circumstances.

At Financial Canadian, we understand the importance of overall financial health. We offer web design services to boost your online presence, but we also recognize the value of managing personal debt. Take proactive steps towards financial stability, whether you want to establish a strong digital footprint for your business or find ways to handle your debts effectively.