Americans who have turned to personal loans to pay down their credit cards have already racked up new debt just months later, according to a new TransUnion (TRU) study.

“As the Fed has raised interest rates in hopes of curbing inflation, many consumers have turned to unsecured personal loans as a way to consolidate their credit card debt to get a lower interest rate,” said Liz Pagel, senior vice president at TransUnion.

The survey—conducted between April 2021 and September 2022—found that respondents who took out a personal loan wound up with the same amount of credit card debt just 18 months later.

Personal loans offer a lifeline

With interest rates on personal loans hovering around 11%—less than half the average credit card rate—Americans are flocking to personal loans in record numbers.

Over 22 million borrowers had an open personal loan in the second quarter of this year—up from the previous high of 21 million at the same time last year.

In 2019, 20.8 million borrowers had a personal loan. While that number dipped to a low of 18.7 million during the pandemic in 2021, consumers have shown a preference for personal loans to pay down their debts.

For many consumers, personal loans offer a way to consolidate and pay off debt more quickly, thanks to lower interest rates.

"Personal loans are generally lower rates than cards, and they are fully amortizing, so you commit to paying down your debt every month," says Renaud Laplanche, CEO and co-founder at Upgrade, a financial services company.

Unlike a credit card, which is a type of revolving credit with variable monthly payments, a personal loan will often give borrowers a fixed payment so they can build that amount into their monthly budget.

When a personal loan makes sense

Personal loans offer interest rates that are less than half of the average credit card. So why doesn’t everyone ditch credit cards and use personal loans instead?

Every borrower’s credit situation differs, so a personal loan may not make sense for everyone. Experts say personal loans should only be used with caution and only by those who have a deep understanding of their finances.

"If your spending is completely under control and you’d like to save some money while paying down debt, a personal loan can work,” says Martin Lynch, president of the Financial Counseling Association of America.

Saving money by taking out a personal loan only works if a borrower can find a personal loan with a lower interest rate than their current credit card. But even then, borrowers must be careful about using personal loans.

Taking a personal loan to consolidate credit could negatively impact a borrower’s credit score. Experts say it’s preferential for borrowers to pay down their credit card balances if possible.

If credit card consolidation isn’t necessary, a personal loan can still negatively affect a borrower’s credit score because it's additional debt.

A vicious debt cycle

Debt consolidation could become a bigger trend as more Americans grapple with ballooning debt. Americans are saddled with record medical, car loan, and credit card debt.

According to the Fed, credit card balances have topped $1 trillion for the first time. Total household debt has reached a staggering $17.06 trillion.

Consolidation loans offer the final lifeline before going down the debt-relief route. And while interest rates on personal loans have also gone up, they remain more affordable than most other credit options.