Should You Get A Loan To Pay Off Credit Card Debt?

Written by , October 1, 2012

Should You Get A Loan To Pay Off Credit Card DebtFor individuals who are struggling under the burden of too much debt, it’s the consumer-type debt – rather than home mortgage debt – that’s quite often the culprit. More specifically, these individuals are probably saddled with a level of credit card debt that they are finding difficult to completely pay off. Even when you’re able to change your spending habits for the better, you’ll still need to pay down the credit card debt you’ve already incurred.

One technique that you might consider is to take out a new loan to pay off your credit card debt.

Here is some credit card advice to consider if you are thinking about pursuing that path.

  • What are the Interest Rates? The first thing to evaluate is the interest rate at which you can borrow new money. Obviously, the bigger the difference between the new loan and your existing credit card debt, the more taking out a new loan could make financial sense. But interest rates are not the only financial consideration.
  • What Are The Loan Fees? There may be a number of different sources for you to borrow money to pay off your credit card debt. For example, if you have built sufficient equity in your home, you may be able to take out a second mortgage or a home equity line of credit. These types of loans and lines of credit generally have origination fees, however, so it’s important to factor this into your calculation. Other types of loans may come with fees as well. In general, the lower the amount you’re looking to borrow, the lower the fees have to be for the strategy to make sense.
  • Are There Any Available Tax Deductions? In some circumstances, interest paid on a home equity line of credit or a second mortgage may be tax deductible. Depending on your overall tax situation, and the availability of this deduction, this may lower the cost of your new loan significantly, and make this a worthwhile strategy.
  • How Easy Will it be to Obtain the New Loan? Remember that each time you apply for a new loan the potential lender will request a copy of your credit report. If you’re rejected more than a few lenders before you get the loan, you’ll have a number of different inquiries on your credit report. Unfortunately, too many inquiries or requests for credit in too short a time could end up lowering your credit score, and cost you more in interest charges in the long run than you would save by getting the loan.
  • How Quickly Could You Pay off your Credit Card Debt Without the Loan? If it would not take you very long to pay off your credit card debt directly, you might not want to go through the hassle and expense of taking out a new loan.
  • Can you Responsibly Handle the Lower Credit Card Balances? This can be the most difficult consideration for some people. Once you pay down your credit card debt, will you be able to avoid running the balances back up again?
  • Remember that it only makes sense to get a loan to pay off your credit cards if you keep the balance on those credit cards low going forward.

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