Everything to know about loans to pay off debt

Yes, a personal loan can pay out one or several credit cards, so the card debt is gone and you're left with one repayment, one rate and an end date. Whether it helps is a different question, and it comes down to the total cost: the loan only works in your favour when the rate, fees and term together cost you less than the cards would, and that's not automatic.

There's no special product to hunt for here either. What people often search as a "credit card loan" is an ordinary personal loan used to pay off card balances, and when it combines two or more debts, lenders call it a debt consolidation loan. Whatever it's called on the lender's page, the working-out is the same, so this guide goes through how it works, what it actually costs, and when you'd be better off leaving things as they are.

How does a personal loan to pay off credit cards work?

You borrow what you owe on the cards and the loan pays those balances out. From then on you're repaying the loan instead of the cards.

The biggest practical change is the end date. A personal loan runs for a set term with equal repayments, so there's a date when the debt is gone. A credit card doesn't work that way. The balance revolves, and if you're only making the minimum repayment each month, you can be paying the same debt off for years while interest keeps being added.

You can also combine credit card debt with other debts in the one loan (two or three cards, an existing personal loan, Afterpay or Zip balances), which is where the "consolidation" name comes from, and why you'll also see these searched as loans to pay off debt. However many debts go in, you come out with one repayment, one rate and one end date.

Is a personal loan cheaper than your credit-card debt?

Often, however not always (the rate you're offered, the fees and, more than you'd probably expect, the term you choose decide it, not the card's rate alone).

Card rates commonly sit around 20% or higher, and personal loan rates are generally lower for the same borrower, which is why this move can work. The comparison to run is the total amount you'll repay before the debt is gone, not the monthly repayment, and not the rate on its own.

Say you owe $10,000 on cards at 20.99% and you can afford about $332 a month. Below is what happens if you keep paying the cards at that pace, what happens if a 3-year personal loan at 12% pays them out, and what happens if you take the same loan over 7 years instead:

Illustrative example at assumed rates of 20.99% (card) and 12% (personal loan). Not an offer, quote or advertised rate.

The 3-year loan clearly beats the cards here: roughly $2,370 less in total, and debt-free 8 months sooner. The 7-year version is the one to be careful with. The repayment nearly halves (~$36 a week freed up), which can be exactly what a tight budget needs, however you'd repay ~$500 more in total than if you'd never taken the loan at all (at a rate ~9 points below the card's). A longer term lowers the repayment and can still cost you more overall, so choose the term deliberately rather than taking the smallest repayment on offer.

Fees change this maths too. An establishment fee or monthly account fee adds to what the loan has to beat, which is why the "comparison rate" (a single percentage with most fees folded in) is the number to put loans side by side with. The full working-out for your own debts, fees included, is in how much consolidation could cost or save.

[[calculator:balance-transfer]]

What rate would you actually be offered?

You can't read it off an ad (lenders price personal loans to your credit profile, so the same loan can be offered to two people at very different rates). The "from" rate an ad leads with is generally the one offered to the strongest applicants, and yours may be higher, which matters here, because whether the loan beats your cards depends on the rate you're offered, not the advertised one.

Applying with lender after lender to find out isn't free either, because each full application is recorded on your credit file as an enquiry (a "hard check"). The alternative is matching first: WeMoney isn't a lender. It's a money management app with a matching service (BrightMatch) that shows you lenders from our panel whose criteria you may fit, before any application is made. You may qualify subject to the lender's own assessment.

Pro tip: BrightMatch uses soft checks only. No damage to your credit file, and no hard checks a lender can see.

[[app]]

Once you have real rates in front of you, the debt consolidation loan checklist covers how to compare the loans themselves (comparison rates, fees and terms).

What about a balance transfer instead?

For some people it's the cheaper move. A "balance transfer" shifts your card debt onto a new card with a low or 0% promotional rate for a set window, however it only works in your favour if you're committed to clearing the whole balance before the window ends. Whatever's left after that is charged at the new card's standard rate. Which option fits your situation has its own decision guide: balance transfer or debt consolidation.

Can you get a loan to pay off credit cards with bad credit?

Sometimes (it's always down to the individual lender, and some specialise in exactly this situation). Expect the rate to be higher, which makes the total-cost check above matter even more, because at a high enough rate the loan stops beating the cards. The realistic options, and the traps to skip, are in consolidating loans with bad credit.

Does paying off your cards with a loan help your credit score?

Not automatically (a loan changes your credit position, and no particular score outcome is promised by anyone legitimate). The application itself is recorded as an enquiry, the paid-out cards stop carrying balances, and from there it mostly comes down to the repayment history you build on the new loan. What moves the score, in which direction and when, is covered properly in does debt consolidation affect your credit score.

One thing the loan doesn't do is close the cards. That part is up to you, and it's worth deciding deliberately rather than leaving the limits sitting open with nothing owing.

When a loan isn't the answer

A loan helps when the card debt is costing you at a rate a loan can beat. It can't help when the repayments themselves are more than you can afford. If that's where things are at, a new loan is rarely the right first move. Your card provider has a hardship team whose job is to work out a change to your repayments with you, and the National Debt Helpline on 1800 007 007 is free, independent and confidential.

It's also completely fine to skip the loan when it isn't needed: if the balance is small and you're close to clearing it, the fees and effort of a new loan may outweigh the saving, and paying the card down directly may be the better move.

Key points

• A personal loan can pay out one or several credit cards (a "credit card loan" usually just means this), leaving one repayment with a set end date.
• Whether the loan beats the cards comes down to total cost (the rate you're offered, the fees and the term together), not the monthly repayment.
• A longer term lowers the repayment and can still cost more in total: in the worked example above, the loan at 12% (illustrative) over 7 years cost ~$500 more than staying on the card at 20.99%.
• You can usually combine credit cards, an existing personal loan and Afterpay or Zip balances into the one loan. Each lender decides which debt types it will take.
• A balance transfer can be cheaper if you can clear the balance inside the promotional window. Whatever's left after the window is charged at the new card's standard rate.
• If the repayments are already unaffordable, hardship teams and the National Debt Helpline (1800 007 007) come before any new loan.

This article is general information only. It doesn't take your circumstances into account.

Sources

• Moneysmart: Pay off your credit card
• Moneysmart: Personal loans
• Moneysmart: Debt consolidation and refinancing
• Moneysmart: Credit card balance transfers
• National Debt Helpline