Balance Transfer Vs. Debt Consolidation
It is never easy to pay off debt, but the load can be lightened with lower interest rates and smaller repayments.
Two popular ways to lower your rate on debt is through balance transfers and debt consolidation loans.
Both of these options have advantages and disadvantages, so, which one is best?
Credit Card Balance Transfers
It is easy to transfer a balance with a credit card and you could pay 0% interest on your debt for a limited amount of time. This means that instead of paying for your interest and your repayment, all of your repayment will go towards reducing your loan balance.
These work well when you know you are able to pay off your debt quickly.
Generally with a balance transfer you will have to a fee. This means that any savings you are making with a lower interest rate will need to be enough to cover the transfer fee as well. Also with a new credit card you may have to pay new annual fees.
The best interest rates are on offer to those that have good credit. You will then need to know the offer that you will get in regards to your credit. For instance you might be offered 0% APR for a certain amount of time, but you will need to know what happed after the promotional period has ended.
Balance transfers aren’t typically bad for your credit, but they could cause issues. When you apply for a new card, lenders will look at your credit and inquires can affect your credit score.
Your score can also be lowered by having too many accounts.
A balance transfer should be used a debt payoff tool and not seen as a way to increase your debt as this will just lead to more problems.
You are able to consolidate your debt with a personal loan, a secured loan or with a P2P loan.
If your loan is large then you could allow you to combine several loans into one. A debt consolidation loan has a fixed rate so there are no promotional periods like a balance transfer.
With debt consolidation loans you may or may not pay any fees. There are some loans that do have fees and others where the fees are built into the interest rate. You should then compare different loans and see what the fees and interests are and which will benefit you the most.
The interest rate you pay will depend on the type of loan you use.
A personal loan that is unsecured may have a higher interest rate than a home equity loan for instance.
However, you will usually pay an interest rate that is lower than your normal credit card rate. If you think it will take a while to pay off your debt then it would be best to use a debt consolidation loan.
A new loan will immediately affect your credit score especially in the short term. In the long term debt consolidation loans have the potential to be better for your credit than a balance transfer.
Credit scores are higher when there is a mixture of credit types and installment loans make you more attractive to a borrower.
A debt consolidation loan could show that you are committed to paying your debt.
If you are interested in a debt consolidation loan, head to FinanceMan.