Should You Use a Personal Loan to Repay Debt?

If you’re struggling with credit card debt, you’ve probably come across a recommendation to sign up for a personal loan as a form of debt consolidation. A personal loan can be an effective part of your debt payoff strategy, but there’s plenty to consider before signing on the dotted line.

What to consider when shopping for a personal loan

On the face of it, the math makes sense. As an illustration, you might be able to obtain a personal loan with an interest rate in the high single digits, versus credit card rates that often exceed 20%. You use the personal loan to knock out the credit card debt right away, and then you repay the personal loan over the next few years. The much lower interest rate is a big win, and it’s easier to make one monthly payment (to the personal loan company) than multiple payments to various credit card issuers.

But personal loans aren’t a great option for everyone. For starters, you typically need a strong credit score and a solid income to qualify for the lowest rates. There can be a massive range – Experian shows some personal loan rates as low as about 6%, with others approaching 36%. The national average is approximately 14% for a 60-month term.

Don’t compare loans based on the advertised interest rate alone. Look at the annual percentage rate (APR), monthly payment, repayment term, and total amount you’ll repay. A lower monthly payment isn’t necessarily a better deal if you’re stretching the debt over a much longer period.

You should also be mindful of fees (for instance, origination fees can range from a modest 1% of the amount borrowed all the way up to a hefty 10%, according to SoFi). This all needs to be factored into the total borrowing cost. To ensure the best outcome, you need to be really disciplined about your budget and your payback schedule.

Getting several offers (at least three) can make a meaningful difference. If possible, look for lenders that let you check potential rates with a soft credit inquiry, then compare APRs, fees, terms, and total repayment costs before applying.

One way the strategy can backfire is if you take out a personal loan and run your credit card balances back up. Life is expensive. If you’re like many of our clients, your debt may have accumulated from practical expenses like medical bills, car repairs, gas, groceries, and other essentials. But if you continue running monthly budget deficits, you’re at risk of ending up with even more debt than before.

When does a personal loan make sense?

For a personal loan to work for you, the following three things need to be true:

• The APR and total cost are meaningfully lower than the debt you're replacing.
• The monthly payment fits comfortably within your budget.
• You have a realistic plan to avoid accumulating new credit card debt.

It’s important to remember that you’re not alone on your debt payoff journey. During the first half of 2026, 45% of our new clients came to us with personal loan debt, a 10-percentage point increase from 2020. The average personal loan balance was $18,870, an 11% jump from just one year ago.

MMI’s experience reflects a much broader trend. According to TransUnion, personal loan balances reached a record $281 billion in the second quarter of 2026, up nearly 10% from a year earlier. Personal loans can be useful financial tools, but the rapid growth underscores why it’s important to understand what a new loan will, and won’t, fix.

Plus, personal loans aren't just becoming more common. Some borrowers are struggling to repay them. TransUnion reports that the share of personal-loan borrowers 60 or more days past due rose to 3.81% in the second quarter, up from 3.37% a year earlier.

As inflation continues to gobble up Americans’ paychecks, debt is growing. On average, income for MMI clients has risen 44% since 2019, from about $46,000 to $66,000. Unfortunately, unsecured debt for those same clients rose a whopping 55% during that span. For millions of Americans, even a steady job and an annual raise have not been enough to keep pace with the rising cost of living.

Remember: You can’t borrow your way out of an ongoing budget shortfall. If you’re consistently running a monthly deficit – the average among our clients is more than $300 in the red – you need to address the underlying imbalance. That may involve increasing your income, reducing expenses, or finding a more sustainable way to manage your existing debt.

Personal loans vs. debt management plans: What's the difference?

A personal loan is a flexible form of unsecured borrowing (meaning it’s not backed by a home, car, or other collateral). It can be used for just about anything – home improvements, debt consolidation, even buying a boat, or going on vacation.  

When used for debt consolidation, a personal loan replaces existing debt with new (typically lower-cost) debt. Borrowers need to qualify for the most favorable terms by demonstrating a strong credit score and ample income.

A debt management plan (DMP) doesn't involve taking out a new loan. It’s a structured payment plan (averaging about four years) that can reduce interest rates through creditor concessions. Nonprofit credit counseling agencies such as MMI offer these plans, which generally start with a debt and budget counseling session.

There are no minimum credit score or income requirements to qualify (although if you don't have enough income to reasonably repay your debts, your counselor will likely recommend a different option that better suits your needs, such as a debt resolution plan or filing for bankruptcy). These plans are customized to fit each client’s income, debt, and budget. Credit cards entered into the plan are closed to prevent accumulating more debt.

On average, accounts included on a debt management plan with MMI benefit from an interest rate below 8%, as opposed to the 28% they were lugging around before they contacted MMI. It’s important to address both sides of the debt and budgeting equation, though. A lower interest rate won’t be a lasting fix if your spending is still outpacing your income.

Not sure whether a personal loan, debt management plan, or another strategy makes sense for you? MMI's experienced counselors can review your debts, income, and expenses to develop customized repayment plan that fits your goals and needs. Start your free, no-judgment consultation online, 24/7.