Debt Consolidation Loan Vs. Balance Transfer
Many people find it quite difficult to pay off debts especially when the amounts involved are high. But if the interest rates are lower and the regular payments smaller, the debt can become more manageable. With credit cards and personal loans, borrowers have a tendency to lower their debt burden through debt consolidation loans and balance transfers.
Both options have benefits and limitations. Not until you weigh both sides of each, making an informed decision on the best option can be daunting.
Credit Card Balance Transfers
Balance transfers offer a quick way and affordable way to pay off your debt. The beauty of this option is that you can pay up to 0% interest on your debt while the other 100% goes into reducing the loan balance.
It is a good option when you want to save on interest rates, but since the rates are promotional, normal rates may apply when the promotion ends. So you may end up paying high fees if you cannot pay the debt quickly. Consider the followings when you want to use balance transfers;
Fees: transferring your balance using credit cards will attract some fees which are often 3% of the amount you transfer or a flat dollar amount. Whichever is higher between the two, you must ensure that the amount you’re saving from the transfer is more than the transfer fees. New credit cards come with annual fees, and you must also check out to ensure you are saving more than you incur.
Interest rates: if you have a good credit score chances of enjoying best interest rates are high. However, you should focus more on what happens beyond the rates, review what the issuer offer after the end of the promotional period.
Your credit: although balance transfers have less impact on your credit, too many consumer accounts can lower your credit score. Don’t forget that when applying for new credit cards; your lender will always consider your score. Make sure your card serve as a debt payoff tool, not a debt increasing tool.
You may decide to consolidate your debt with a personal loan, secured loan or person to person loans. With debt consolidation, you combine all your debts into a single payment with lower interest rates and regular payments.
Another good point with debt consolidation loans is the fixed interest rates. That makes this option the best when the promotional periods are too short.
Fees: with debt consolidation loans fees may come as processing fees, or others may be built into the interest rates. It’s upon you to compare different options to see which combination of fees and interest is more affordable to you.
Interest rates: Interest rates are dictated by the nature of your loan. Unsecured personal loans always attract a higher rate than secured personal loans. Fixed interest rates are much better than variable rates when it comes to planning your debt, but they may be higher at the beginning.
Your credit: a new loan affects your credit score. In the long run, debt consolidation loan may improve your score when compared to balance transfers. You can also improve your credit score by mixing different types of credit and installment loans.
A consumer who borrow different types of loans has a good score than the one who relies on one line. For instance borrowing with credit cards means you are overspending on current consumption, this is not sustainable. However, with debt consolidation it shows you trying to pay off your debt using the right type of debt.
Therefore it can be said that if you stick to your schedule and avoid taking unnecessary debt, then you can still pay other debts in the future. Now you can decide which option will work for in the most affordable way.