Debt Consolidation Loan Vs. Balance Transfer Credit Card – Forbes Advisor

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If you’re looking to consolidate debt, you may consider using a balance transfer credit card or personal loan (ie debt consolidation loan). Both options can simplify debt repayment while potentially lowering your interest rate.

Learn about the differences between a balance transfer and a personal loan to decide which approach to debt consolidation is right for you.

Balance Transfer vs. Personal Loan: What’s the Difference?

A balance transfer involves transferring the balance on one or more credit cards to a new credit card, typically one with a 0% APR promotional period that spans 12 to 21 months. As long as you pay off your balance before this promotional period ends, you won’t owe any interest. If you carry a balance at the end, however, you could face high interest charges.

A personal loan, on the other hand, is typically an unsecured loan that you pay off in monthly installments. You can use the funds to pay off your existing debts or a lender might pay off your creditors for you. Then, you’ll make fixed monthly payments on your loan over a set period of time, typically anywhere from one to seven years. Depending on your credit, you could qualify for a competitive rate.

Pros and Cons of Balance Transfers and Personal Loans

Both balance transfers and personal loans have advantages and disadvantages. A personal loan can often offer higher loan amounts and a longer repayment term than a balance transfer, for example. However, you’ll have to pay interest on a personal loan, whereas some balance transfer credit cards waive interest charges for a year or longer.

Pros of a Personal Loan

  • You can use a personal loan to consolidate multiple types of debt, such as credit card balances, medical bills or other personal loans.
  • Some lenders will pay off your creditors directly, simplifying the process of debt consolidation.
  • You may be able to borrow as much as $ 100,000 and get seven years to pay it off.
  • Fixed interest rates and monthly payments make it easier to budget and work toward a specific payoff date.

Cons of a Personal Loan

  • You may not get a competitive rate if you don’t have strong credit.
  • Some lenders charge an origination fee.
  • You’ll have to pay interest charges from the beginning, unlike a balance transfer credit card with a 0% promotional period.

Pros of a Balance Transfer Credit Card

  • You could qualify for 0% APR for a period of up to 21 months, depending on the card, which can save you money on interest.
  • With no interest accruing, you may be able to pay down your debt faster.
  • Some cards don’t charge an annual fee and offer rewards, such as travel points or cash back.

Cons of a Balance Transfer Credit Card

  • The 0% APR period won’t last forever, so you could face high interest charges if you’re still carrying a balance when it ends.
  • Some cards charge a balance transfer fee of 3% to 5% of the amount you transfer.
  • You may need excellent credit to qualify, and the limit you get approved to transfer might be lower than what you owe.

Find the Best Balance Transfer Credit Cards Of 2022

5 Questions to Ask When Choosing a Balance Transfer or Personal Loan

Choosing a debt consolidation strategy isn’t always straightforward. Ask yourself these five questions to help you understand which option is the better fit.

1. What Are the Interest Rates and Fees?

When deciding between a personal loan and a balance transfer, consider which option would save you the most in interest and fees. A balance transfer may be the less expensive option if you can pay off your balance in full before the 0% APR introductory period comes to an end.

Make sure to read the fine print, however, because your interest rate could shoot up to 16% or more when the promotion ends. Watch out for a balance transfer fee, too, as that could factor into your savings.

Some personal loan lenders don’t charge any fees to take out a personal loan, while others charge an origination fee of up to 8% of your loan amount. If you opt for a personal loan, compare rates from multiple lenders to find the best offer.

2. How Much and What Types of Debt Do I Have?

If you owe a large amount of debt, you may prefer a debt consolidation loan to a balance transfer. Balance transfers typically max out at a certain percentage of your credit limit, whereas you may be able to borrow a personal loan up to $ 100,000.

What’s more, you can use a personal loan to consolidate multiple types of debt. Balance transfers, on the other hand, are typically reserved for transferring credit card balances. If you want to consolidate a large amount of different types of debt, a personal loan might be the better fit.

3. What’s the Repayment Schedule?

When you borrow a personal loan, you typically agree to pay it off with fixed monthly payments over a certain number of years. Because your payments stay the same month after month, you can more easily budget for them.

With a balance transfer credit card, you can choose how much you pay each month, as long as you make the minimum payment. To pay off your balance in full before the 0% APR period ends, you may need to use a calculator to determine your monthly payments.

Then, it’s up to you to stick to that payment schedule and avoid accruing additional debt. If you start racking up new charges on your credit card, you could find yourself in a worse situation than when you started.

4. How Will This Impact My Credit?

Opening a new credit card or loan account can impact your credit in a few different ways. At first, your credit score could drop a few points when the creditor runs a hard inquiry to check your credit. As long as you make on-time payments on your debts, however, your score should bounce back.

Opening a new credit card can also impact your credit utilization ratio — the amount of credit you’re using compared to the amount available to you. To protect your credit score, keep your credit utilization under 30%.

Having a mix of credit can also improve your score. Credit cards represent revolving debt, for instance, while a personal loan is a type of installment debt. If you don’t hold any installment debt, borrowing a personal loan could diversify your credit mix.

Perhaps the most important influence on your credit score, however, is how you manage your balance transfer card or personal loan. Making on-time payments and paying down your debt can improve your credit.

5. What Are the Credit Requirements?

You’ll likely need a good or excellent credit score to qualify for a balance transfer credit card or personal loan. On the FICO scoring model, a good score starts at 670, a very good score starts at 740 and an exceptional score starts at 800.

Some personal loan lenders have more flexible borrowing criteria, allowing you to qualify with a fair credit score (below 670) or a creditworthy co-signer.

You may be able to prequalify for a personal loan online with no impact on your credit score. Prequalifying can give you a sense of your rates, terms and loan amounts, but your offer won’t be locked in until you submit a full application and permit a hard credit inquiry.

Bottom Line

Both a personal loan and a balance transfer can help you simplify debt repayment and potentially save money on interest charges. If you’re dealing with high balances on multiple types of debt, a personal loan might offer the flexibility you need. But if you owe money on a credit card or two that you can pay off in 21 months or less, a balance transfer credit card could offer greater interest savings.

Whichever option you choose, make sure you’ve read the details of your loan or credit card agreement, including rates and terms. By sticking to your payment schedule — and avoiding accruing additional debt — you can move closer to a debt-free life.

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