Should I take out personal loan to pay off $25,000 card debt?

To Her Credit columnist Sally Herigstad
Sally Herigstad is a certified public accountant and the author of "Help! I Can't Pay My Bills: Surviving a Financial Crisis" (St. Martin's Press, 2006). She writes "To Her Credit," a weekly reader Q&A column about issues involving women, credit and debt, for, and also wrote for MSN Money, and, and has guested on Martha Stewart Radio and other programs.

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Question Dear To Her Credit,
I have four credit cards with balances totaling over $25,000. I have one with an annual percentage rate of 13 percent, and the others are all at 21.99 percent.

I am considering taking out a personal loan at my bank with an annual percentage rate of 16.9 percent, which I would pay off in five years. The monthly payment on the loan would be about the same as I pay total to the four cards now.

Is that a good idea, to consolidate the four payments? – Sheila


Dear Sheila,
Let’s see. Four higher interest credit cards that could take practically forever to pay off versus one loan with a lower interest rate, set payments, and a firm date it will be paid and done. Sounds like a great idea to me!

By consolidating the four balances, you avoid the trap of making small payments that don’t really get you any closer to paying your balances off. Plus, if you make an occasional purchase on the cards, or incur a late fee or two, your balance can increase instead of decrease over time. Credit cards are wonderful payment tools, and I’m not sure how I’d get along without them. They are not great long-term loans.

That said, you should ask yourself a few questions before you sign up for a personal (unsecured) loan at your bank.

First, read the terms of your loan carefully. Check for hidden fees; for example, to open the account. Ask if you will be liable for prepayment penalties if you pay it off sooner. And make sure the interest rate is fixed for the five-year term of the loan.

Second, make sure you are looking at all your options. For example, you could find a better deal. A 16.9 percent loan is better than the rate you are paying on most of your cards, but not by much. I’ve seen credit unions offering personal loans for under 9 percent interest. If you’re not being offered the bank’s best rate because your credit score is less than excellent, then you may be stuck with the 16.9 percent. Just make sure you have explored all your options.

You may want to consider taking out a different type of loan. A secured loan may have an even lower interest rate. You can secure a loan with a house or other real estate, a car or other asset. If you have substantial equity in your house, you may want to explore the interest rates on a home equity loan, where the interest is typically tax deductible, and generally run far lower than 16.9 percent.

If your parents or other persons would be open to lending you money, they may be happy to make more interest income than they are getting at the bank right now, while helping you get out of debt. (Be very, very sure you can pay them back. Relationships are more important than saving a few dollars in interest.)

Another option is to apply for a balance transfer card with a low-interest or 0-percent interest introductory period. It’s not a permanent solution, but you could transfer your balances, and work very hard to pay as much off as possible before the introductory period ends. If you choose this option, make sure you know how much you will be charged in balance transfer fees, typically 3 to 5 percent on the amount transferred. The downside is that you run the risk of not getting approved for a credit limit high enough to cover all the card balance you owe.

Whatever method you choose to consolidate your credit card debts, make sure you don’t run up the balances on your old cards once they are paid off. No one intends to do that, but it happens. You may want to strategically close one or two of your old cards. You should generally keep the accounts you’ve had the longest, all other factors being equal, for the sake of your credit score.

While you’re paying off consumer debt, it’s important to look at your complete financial picture. All your financial goals need to work together. For example, building up an emergency fund is just as important as getting out of debt, because an emergency fund means you won’t have to rely on credit cards the next time the car breaks down or something else comes along. At the same time, keep investing in yourself and your job or business skills, so you increase your earning potential. Keep up the good work; making a plan to pay off your debts is a great start to taking charge of your financial life and your future.

See related: HELOC versus cash-out refinance to repay card debt, Is an unsecured loan the best way to consolidate debt?

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Updated: 11-21-2017