Debt Consolidation Loan vs Balance Transfer: Which is Right for You?
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Debt consolidation consolidates several debts into a single account. It can help you save money, lower your monthly payments, and streamline your payment process. Although you can consolidate your debt in several ways, debt consolidation loans and balance transfers are the most common.
Here’s what you need to know about each of them in order to determine the ideal debt consolidation strategy for your particular situation.
If you need a loan to consolidate high-interest debt, Credible lets you view your prequalified personal loan rates from various lenders, all in one place.
Debt Consolidation Loan vs Balance Transfer: What’s the Difference?
Debt consolidation loans and balance transfer credit cards are credit products you can use to consolidate other, higher-interest debt. Here’s an overview of how each works.
What is a debt consolidation loan?
A debt consolidation loan is a type of unsecured personal loan. If you subscribe to one, you will receive a lump sum upfront. Then you will repay what you borrow in fixed monthly payments over a set period of time. Although loan amounts vary, they can range from $1,000 to $100,000.
If you have different types of debt that can take years to pay off, a debt consolidation loan is worth considering.
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What is a balance transfer credit card?
Balance transfer credit cards allow you to transfer balances from your current maps to a new card, usually with a 0% APR introductory period of six to 18 months. If you pay off all your debts before the end of this introductory period, you can save a lot on interest. But keep in mind that once the period is over, you’ll start earning interest on the remaining balance on the card, and credit cards can have high interest rates.
If you have a lot of high interest credit card debt and you can pay it off during the introductory period, a balance transfer credit card might make sense.
Advantages and disadvantages of a debt consolidation loan
Before choosing a debt consolidation loan, consider these pros and cons:
- You can use a debt consolidation loan to consolidate several types of debt, such as credit card debtmedical bills and other personal loans.
- Some lenders will pay your creditors directly so you don’t have to, which will simplify the debt repayment process.
- Compared to a credit card, a debt consolidation loan usually comes with a lower interest rate.
- You will have a clear payment date and can budget it accordingly.
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- If you don’t have the best credit, you may find it difficult to get an interest rate lower than what you are currently paying.
- Some lenders charge origination fees, prepayment penalties, and other fees when you take out a debt consolidation loan.
- There is no 0% APR introductory period like some credit card offers.
- If you don’t make your payments on time, every time, your credit can take a hit.
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Advantages and disadvantages of a balance transfer
Here are some pros and cons to think about before deciding on a balance transfer:
- You can benefit from a 0% APR introductory period, which can save you hundreds or even thousands of dollars in interest.
- Some cards offer rewards, such as cash back and travel points.
- Opening a new card can lower your credit utilization ratio (the amount of credit you use compared to the amount of available credit you have) and, therefore, improve your credit score.
- If you don’t pay off your debt before the end of the 0% APR period, you could face high interest charges.
- Some cards charge a balance transfer fee of 3% to 5% of the amount you transfer.
- You may not qualify for a balance transfer credit card unless you have good credit.
When comparing a debt consolidation loan and a balance transfer, consider the following factors:
- Interest rate (amount and type) — The interest rate is the cost you will pay to borrow money. It can be fixed and stay the same or variable and fluctuate depending on market factors. The lower the interest rate, the better.
- APR – APR stands for annual percentage rate and refers to the amount you will actually pay for the loan or credit card, including your interest rate and any fees. If you qualify for a balance transfer card with a 0% introductory period and can pay off your balance before it ends, a balance transfer may be the most affordable option.
- Costs – Costs for a debt consolidation loan may include origination fees and prepayment penalties. A balance transfer fee of 3% to 5% of the amount you transfer is common with a balance transfer credit card.
- Credit Score Requirements — You’ll likely need good or excellent credit to qualify for a balance transfer credit card or personal loan. The good news is that some personal lenders have more lenient borrowing criteria.
- Types of debt you consolidate — You can use a personal loan to consolidate several types of debt, such as medical bills and credit cards. A balance transfer credit card, however, is designed for high-interest credit card debt.
Where to get a debt consolidation loan
You can get a debt consolidation loan from a bank, credit union, or online lender. While banks and credit unions tend to offer competitive rates, they generally have stricter requirements than online lenders. Also, you must join a credit union before taking out a loan from it.
If your credit score is preventing you from getting approved for a debt consolidation loan, you may want to apply with a co-signer who has good credit or take the time to improve your credit before to make your request.
If you’re ready to apply for a debt consolidation loan, Credible makes it quick and easy compare personal loan rates to find the one that suits your needs.
Many banks and credit card companies offer balance transfer credit cards. If you’re having trouble qualifying, check your credit reports and dispute any errors. Also focus on making your payments on time and do your best to pay off some of your credit card debt to improve your credit utilization.