Thinking of Consolidating Holiday Debt With a Personal Loan? In This Scenario, That May Not Be the Best Idea

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It’s a move that could backfire on you. 

If you ended the 2022 holiday season with a whopping pile of debt, you’re no doubt not alone. It’s hard to cut back during the holidays when they only roll around once a year and there’s so much pressure to go all out and be generous with the people you love.

But if you have multiple balances across different credit cards, you may be looking for an efficient and cost-effective way to pay down that debt. And consolidating your debt with a personal loan may be an option you’re considering.

READ MORE: Best Debt Consolidation Loans

A personal loan lets you borrow money for any purpose. You can take one out and use the proceeds to pay off your credit cards. From there, you’d simply make one personal loan payment a month, as opposed to several credit card payments.

Plus, you’ll often snag a lower interest rate on a personal loan than you will on a credit card. So in many cases, consolidating credit card debt into a personal loan makes financial sense. But that’s not a given.

When your credit score needs work

Personal loans are unsecured, which means they’re not tied to a specific asset (whereas mortgage loans, for example, are secured by the homes they’re used to finance). This means that if you fall behind on your personal loan payments, your lender really has limited recourse. Your lender can’t, for example, go after your car to pay off the loan you’re behind on.

That’s why personal loan lenders place so much emphasis on having strong credit. If you’re a borrower with a great credit score, you might snag a really competitive interest rate on a personal loan. But if your credit score is poor, you could end up with a really high rate on a personal loan, since your lender will think it’s taking on a greater risk of not getting repaid.

And that’s why consolidating holiday debt with a personal loan isn’t automatically a good move. If your credit score isn’t in good shape, you might get stuck with just as high an interest rate on a personal loan as what your credit cards are charging you. In some cases, you might even end up paying a higher rate of interest on a personal loan.

Look at different solutions

A personal loan isn’t your only option for consolidating holiday debt. If you own a home, a home equity loan may be a better solution.

The reason? Home equity loans are secured, so even if your credit is poor, you might get a lower interest rate on one because your lender is taking on less risk. In an extreme situation, a home equity loan lender could force the sale of a home to get repaid if a borrower falls behind.

But if consolidating your holiday debt doesn’t end up working out, tackle your various credit card balances in order of highest interest rate to lowest, and keep a calendar with your cards’ due dates so you know when to make your payments. Debt consolidation can be a helpful way to pay off high-interest debt. But if it won’t be cost-effective for you, there’s no sense in going down that road.

Our picks for the best personal loans

Our team of independent experts pored over the fine print to find the select personal loans that offer competitive rates and low fees. Get started by reviewing our picks for the best personal loans.

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