How to use a personal loan to pay off debt
Struggling with debt? A personal loan can help you consolidate your debts into one monthly payment, ideally with a lower APR.
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Anna Baluch has spent more than six years covering personal finance and is an expert on loans and mortgages. She has bylines at the New York Post, Forbes, and U.S. News & World Report.
Updated September 25, 2024, 7:30 PM EDT
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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.
Good to know
The average annual percentage rate (APR) for a 24-month personal loan was 12.49% as of February 2024, according to the Federal Reserve, while credit card rates averaged 21.59%.
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.
Tip
Personal loans may come with upfront origination fees. These can range up to 12% of the loan amount and are typically deducted before you receive the funds, which can leave you short of your goal. Keep this in mind when calculating how much to apply for.