If you’re looking to reduce the cost of a personal loan, using a credit card can be a good way to achieve your goal.
Find the right credit card
What is a personal loan?
There are many types of personal loans available, and the best option will depend on your individual requirements and your financial circumstances. Personal loans can be helpful when it comes to borrowing a large amount of money for a few reasons.
Interest rates on personal loans are usually fixed and are often lower than credit card rates, which is useful if you are borrowing a large amount. Loans have the benefit of a fixed repayment timeline so that you know the exact amount that you need to repay each month.
A personal loan can be expensive if you are paying a high interest rate. If you are aiming to pay off your loan more quickly, there are ways that you can reduce the amount you pay in interest and speed up the repayment process.
How to pay off a personal loan
Debt can be stressful, however, there are ways that you can reduce the cost of your debt and cut down the time it takes to pay it off. Take time to consider the best approach for your personal circumstances and your financial situation.
Use existing savings
If you have cash savings, it may not be your first thought to use them to repay debt. Consider that it can be cost-effective to pay down your personal loan with money from savings. Unless your personal loan has hefty early repayment charges, the interest you pay on a personal loan will cost more than the returns you earn on savings. Pay down the loan balance with savings and you can reduce the cost of your loan, as well as your repayment timeline.
Make additional payments
You can usually make overpayments towards your personal loan if you want to reduce the balance more quickly without paying off the loan in full. Before you make an overpayment, check that you will not be charged any extra costs as some lenders will restrict the amount that you can pay on top of your monthly repayment amount.
Switch to a loan with better terms
One way that you can cut the cost of borrowing is by switching to a lower interest rate loan, or looking to switch to a shorter term loan. A shorter term loan will increase the cost of your monthly repayments, however, you will pay less interest which will reduce the overall cost of the loan.
Use a debt consolidation loan
Debt consolidation loans allow you to merge all of your outstanding debts into one loan. You can then repay with one monthly payment, rather than juggling multiple payments and paying different interest rates to each lender. Debt consolidation loans can be costly to set up and may be secured loans, so this option is not suitable for everyone.
Can I use a credit card to pay off a loan?
Credit cards can be a good option to help manage debt, provided that you only use the card for a particular purpose. Often, people use a loan to pay off credit cards with high interest, but you can also use a credit card to pay off a personal loan and reduce the cost of borrowing.
To get the maximum benefit from using a credit card to pay off a loan, choose a credit card with a 0% interest rate introductory period. With this loan repayment method, you can reduce the cost of borrowing to 0%, which can help you to repay the full balance in less time. The best 0% deals will often only be available to applicants with good credit scores, so look for a low interest rate offer if you are not eligible for a 0% card.
Remember to be aware of the risks that come with further borrowing in order to pay off a personal loan. If used correctly, a credit card can help you take control of your debt repayments and save you money. Always pay attention to the terms offered on any credit card as there may be hidden charges and fees.
Do I need a balance transfer or money transfer card?
To pay off a personal loan with a credit card, you’ll need a credit card that offers money transfers. Money transfer credit cards work in a similar way to balance transfers with one key difference. A balance transfer moves the balance from one credit card to a new credit card, but a money transfer allows you to move funds from a money transfer credit card into a bank account.
Once a money transfer card is approved, you can transfer the money from the card into your account and settle your personal loan. This means that you will repay the full amount owed to the credit card provider, often at 0% or a lower interest rate than was originally on the personal loan.
When you carry out a balance transfer or a money transfer you will usually be charged a fee, which is a percentage of the amount transferred. You will also be required to make a minimum monthly payment on the credit card, which is based on the outstanding card balance.
Set up a direct debit for your monthly payments. A direct debit is the best way to make sure that you do not miss a payment. If you miss a monthly payment, your credit card provider can remove the promotional interest rate, and you will be charged high interest rates on the credit card balance.
What do I need to consider before paying off a loan with a credit card?
There are a number of important factors that you should consider before you decide to use a money transfer credit card to pay off a personal loan:
Check credit card transfer fees
It is typical that a credit card offering a balance transfer or money transfer will charge a fee, which is usually around 3% of the amount being transferred. This will be added to the balance of the card and can be costly if you plan to transfer a large amount. Before you go ahead with a transfer, make sure that the amount you will save overall by moving the debt exceeds the transfer fee to make the move worthwhile financially.
Look out for early repayment charges
Before you apply for a money transfer, check the terms of your personal loan and make sure that you are able to make early repayments without incurring additional fees. Certain personal loan providers will charge a fee for early repayment to offset the interest that they will lose. These charges can eliminate any gain from moving your loan balance, so be clear on what early repayment will cost you.
Avoid card purchases
The best money transfer cards will offer a promotional 0% or low interest rate on transfers. Be aware, however, that this rate is unlikely to apply to new purchases made on the card. The interest rate on purchases is likely to be high, so avoid any additional spending on the credit card and only use it for the intended money transfer purpose.
If you are using a credit card which charges 0% interest on money transfers, ensure that you will be able to pay off the credit card balance before the end of the promotional period. The interest rate following a 0% promotional period is often high, so avoid incurring any extra costs by clearing your balance before the 0% period ends.
How to balance transfer a personal loan to a credit card
The steps required to balance transfer a personal loan to a credit card are simple, and can significantly cut the amount you pay in interest on borrowing. Reducing the amount of interest you pay can free up more money to put towards clearing the balance of your remaining debt.
Request an early settlement figure for your personal loan. This will detail the exact amount that you need to pay, including any early repayment charges, to clear the full loan.
Once you have the early settlement figure, check that you will in fact save money by carrying out a personal loan balance transfer. Remember to account for the money transfer fee that you will be charged by the credit card provider when you move the loan balance (this is usually a percentage of the transfer amount).
Compare the available money transfer credit cards and check your eligibility before you apply for a card. Avoid applying for multiple credit cards at once as this can have a negative impact on your credit score.
Once you receive your money transfer credit card, transfer the required funds to your bank account and settle the personal loan. Remember to confirm with the loan provider that the balance has been settled in full.
Pay off the balance on your credit card. If you have a 0% promotional period, be sure to repay the full amount before the end of the promotion to avoid costly high interest rates kicking in.