Why Are Borrowers Turning to Personal Loans to Tackle Credit Card Debt?

In 2020, during the initial panic of COVID-19, fewer Americans were applying for and receiving approval for credit cards. These borrowing changes made sense at the time, as employers and workers alike were uncertain about the future.

Yet, by 2023, consumers had shifted out of savings mode and began borrowing at historic rates. In fact, according to Large Bank Credit Card Data, the first quarter of 2023 saw a considerable increase in credit card originations.

But that wasn’t the only exciting trend happening. While more borrowers were borrowing higher dollar amounts on their credit cards, those with balances were searching for a way to reduce their financial obligations.

The need to tackle credit card debt led to a sharp increase in borrowers consolidating cards into unsecured personal loans.

The Growing Trend of Personal Loans

Credit card balances steadily rose after a brief tumble in 2021 to levels not previously seen since 2016. By the second half of 2022 and into 2023, credit card balances, number of accounts, account balances, and credit limits were all near (or at) historic highs.

As credit card debt soared, another trend caught fire. This report, “Debt Consolidation in a Rising Rate Economy,” announced that the share of unsecured personal loans used for credit card consolidation increased by 54% in Q3 2022, compared to the same pre-pandemic period in 2019.

Rather than allow debt to snowball out of control, the mostly prime and above-risk tier borrowers used personal loans to reduce financial pressure—if only temporarily.

But let’s not get ahead of ourselves. Instead, let’s investigate the trend of using personal loans to consolidate debt and identify why it’s occurring more frequently this year.

Key Takeaway: In the wake of COVID-19, there has been a significant increase in borrowers utilizing unsecured personal loans to consolidate credit card debt. This trend highlights the need for financial relief and stability during times of uncertainty. It also showcases the growing popularity and accessibility of personal loans as a viable option for managing and reducing credit card debt.

Why Are Borrowers Turning to Personal Loans?

People choose personal loans for several reasons. One of the most significant is that they’re quick and straightforward to get. You can often apply online and get approved fast.

Additionally, there are many borrowing choices out there. You can find a loan that suits you quickly online, regardless of whether you are looking for low-interest rates or flexible payment plans.

Lastly, there’s the benefit of a better credit score. A well-handled personal loan can make it better. As long as you’re paying down your balance each month with no late payments, your score should grow.

Key Takeaway: The ease and accessibility of personal loans make them a popular choice for borrowers looking to consolidate credit card debt. Additionally, successfully managing a personal loan can lead to an improved credit score, making it a viable long-term solution for financial stability.

Benefits of Using Personal Loans for Credit Card Debt

There are also many reasons why borrowers often roll their credit card debt into private loans. Here are several that make financial sense.

• Interest Payment Savings: For credit card holders with balances, the lower interest rates on personal loans lead to significant savings. You’re trading a high-cost debt for a cheaper one, and who wouldn’t want that?
• Payment Predictability: With a personal loan, terms are easy to understand, and you have a set payoff date. Additionally, there’s a fixed monthly payment. These benefits reduce surprises and lead to a more straightforward budgeting experience.
• More Straightforward Finances: Multiple credit cards mean multiple payments, varying interest rates, and a lot of hassle. Consolidating high-interest cards into one personal loan streamlines your financial obligations into one payment that’s much easier to manage.
• Impact on Scores: A well-managed personal loan can give your credit score a welcome bump, significantly when you’re reducing your revolving lines. This might be why consolidators saw nearly 20-point increases in their credit score after receiving a personal loan.

Key Takeaway: Consolidating credit card debt into a personal loan can lead to significant financial benefits such as lower interest payments, more straightforward finances, and improved credit scores. This makes it an attractive option for borrowers seeking relief from high-interest credit card debt.

Potential Drawbacks of Personal Loans

Everything has pros and cons, so let’s discuss the potential downsides of using personal loans for credit card debt.

First, there’s the real danger of getting caught in a debt cycle. According to this article, 18 months after using a personal loan to pay off credit card debt, many borrower’s credit card balances were right back where they started.

Yikes! Avoid this problem by changing your spending habits and following a budget. Otherwise, you’ll pay off one debt but then rack up another, and the vicious cycle continues.

Next, let’s talk fees. Personal loans might not have the hidden charges that credit cards do, but some still come with origination or early repayment fees. These can add up and eat into the amount you’re saving on interest, so always read the fine print.

Lastly, bad credit makes things more challenging. With a low credit score, you could receive personal loan terms with higher interest rates than your existing card. If that’s the case for your situation, paying more interest won’t improve anything.

And let’s not overlook the grim fact that debt feels like a never-ending story for some borrowers. According to the same article, many borrowers believe it’ll take five years—or even a lifetime—to fully repay their current debt levels.

Key Takeaway: While personal loans have several benefits, it’s essential to be aware of potential drawbacks such as falling back into a debt cycle, fees, and unfavorable terms for those with bad credit. Additionally, it’s crucial to develop healthy spending habits and follow a budget to avoid accumulating more debt in the future.

Making an Informed Decision About Personal Loans

Before securing a personal loan, consider whether it’s a sound financial strategy.

Review your current credit card rates and balances versus what you will pay with a personal loan. If you save money in the short and long term, then it’s likely a good option.

Afterward, assess your monthly budget to ensure you can afford regular loan payments. If you find the payments too challenging with your income level, it may not be the ideal time to take out a loan.

Lastly, get serious about your budgeting. Those with high debt levels cannot afford to use these loans for unintended purposes. Focus only on consolidating and eliminating debt.

It’s also crucial to choose the right lender when selecting personal loans. Reputable lenders like Level Financing offer the same reliability as traditional banks combined with more attractive rates and an easier application process. Answer this quick quiz and find out whether you can qualify for a loan today.

Key Takeaway: Ultimately, the decision to use a personal loan to consolidate credit card debt should be made after careful consideration of your current financial situation and future budgeting abilities. It’s essential to assess the potential short and long-term savings as well as ensure you have a plan in place to avoid accumulating more debt in the future.

Conclusion

Personal loans can combat high-cost debt, but it requires dedication to pay off, just like any financial instrument.

Borrowers who want to solve financial challenges quickly have fast approval odds and a range of choices to fit various needs.

However, that doesn’t mean there are no risks. Therefore, responsible use is key to avoid falling back into debt.

Thus, weighing the advantages and disadvantages carefully, understanding all terms and conditions, and ensuring you can commit to regular payments is essential.

Used responsibly to consolidate more expensive credit card debt, personal loans can be an effective way to get better control over your debts and finances.