Should You Use an Installment Loan to Pay Off Your Credit Cards?

Spending yourself into credit card debt is fairly simple: You spend more money on the cards than you currently have and repeat until you're maxed out. Getting yourself out of credit card debt, on the other hand, is a bit more complicated. You have many options, and none of them are easy.

One of the ways you could pay off that debt is to consolidate all those cards into a single debt: a personal installment loan. You use that loan to pay off all your credit cards, leaving you with only one easy payment to make each month. Is this the best method for you? Read on to find out …

Here’s how installment loans work.

When you take out a personal loan, it’s likely to be structured as an installment loan. This means that you pay the loan off in a series of fixed, regular payments. You’ll be borrowing a single lump sum of money that you will repay plus interest.

The interest rate on your personal loan will vary depending on your credit score. The higher your score, the more creditworthy you will be to a potential lender and the less interest they will charge you. The lower your score, the riskier you will seem and the more interest they will charge you in order to account for it.

Interest on installment loans is accrued over time. The longer a loan is outstanding, the more interest it will accrue. However, that interest will accrue based on the remaining principal, so the actual amount of money you accrue in interest will grow smaller over time.

Lastly, installment loans are amortizing, which means that every payment you make goes towards both the principal owed and the interest. The amount that goes towards each is determined by the loan’s amortization schedule, but you can rest assured that every on-time payment you make will bring you one step close to being out of debt.

(For all the details on installment loans, check out the TheLending Guide to Installment Loans here.)

Will the loan save you money?

Okay, so this question is actually pretty simple to answer: Yes, paying off your credit cards with an installment will almost certainly save you money in the long run.

Here’s why: The standard term for a personal installment loan is anywhere between one and five years. And no matter how long the loan’s repayment term is, it’s pretty much guaranteed to be shorter than the length of time it would take you to pay off your credit cards making only the minimum payments.

The monthly minimums for credit cards are often very small, with each payment only accounting for something like one to three percent of the amount owed. When interest rates are factored in, it could take you well over a decade to pay off those cards.

Remember, the longer a loan or credit card is outstanding, the more money you will end up paying towards interest. All things being the same, the shorter repayment option will always be the one that saves you money overall.

What’s the interest rate?

As we mentioned up above, interest rates for both personal loans and credit cards will vary depending on your credit score. So if you have good credit, you’ll probably be able to qualify for some personal loans at a reasonable interest rate.

Furthermore, the interest rates for personal loans are generally lower than the interest rates for credit cards. So even if the rate is higher than you might prefer, it’s still probably lower than the rate you’re paying on your credit card.

However, racking up a lot of excess credit card debt is going to lower your credit score, as the amount of debt you owe is the second most important factor in your credit score. This decreases the likelihood that you’ll find an online loan or a loan from brick-and-mortar lender with a great rate.

It’s a bit of a Catch-22 scenario: You want to find a low-cost personal loan to pay down your credit card debt, but you need to pay down your credit card debt in order to qualify for the low-cost personal loan.

What are your monthly payments?

We mentioned earlier that the monthly minimum payments for credit cards are very small. It's a double-edged sword; those small payments make it much harder to get out of debt but it also means they're fairly affordable—especially relative to the amount of debt you owe in total.

This is where we arrive at the biggest issue with consolidating your debt through a personal installment loan: Even with a lower interest rate, those shorter repayment terms almost guarantee that your monthly payment will be larger than the monthly minimums on your credit cards.

If you’re struggling to afford your monthly minimum payments, this could make consolidation a non-starter for you. Saving money in the long run is great, but you still have to be able to afford your payments in the here and now.

Here’s the flipside: Any debt repayment plan is going to involve paying more each month than you’re currently paying towards your monthly minimums. Don’t let those larger payments discourage you: trim your budget, maybe pick up a second job or side hustle, and get crackin’.

What are other methods of debt repayment?

Consolidating your credit cards onto a personal installment loan is a viable method of debt repayment—especially if you’ve got a decent credit score—but it’s far from the only method out there.

The two most popular debt repayment methods are the Debt Snowball and the Debt Avalanche. Both of these involve putting all of your extra debt repayment funds towards one debt at a time, rather than spreading them around evenly. The difference comes in how they prioritize which debts to pay off first.

With the Debt Snowball, you pay off your debt with the lowest balance first, working your way up to the debt with the largest balance. This will actually cost you a little more money in the end, but it prioritizes early victories to help you get the encouragement you need to keep going.

The Debt Avalanche, on the other hand, keeps its eyes on the numbers. It has you prioritize your debts by interest rate, paying off the highest-rate debt first and then working your way down to the debt with the lowest rate. This saves you money compared to the Debt Snowball, but it could leave you waiting awhile before you notch your first debt pay-off victory.

Lastly, you could transfer your credit card balances onto other cards using a zero percent APR offer. This gives you an interest-free grace period to work with, but carries the sizeable risk of leaving you with more credit card debt than when you began.