Balance Transfer vs. Personal Loan: Which One Should You Choose When Consolidating Your Loans?
Paying off debt on time is never easy. However, finding ways to lower the interest rate or make smaller monthly payments can go a long way in ensuring everything is under control.
When it comes to common consumer debts such as credit card debts, two of the most popular ways to lower your interest rate include credit card balance transfers and debt consolidation using personal loans.
But what is the major difference between these two methods and which one is the best for you?
While both of them have advantages and disadvantages, it becomes relatively easy to make an informed decision once you understand how they work.
Read on to find out when to use balance transfer and when to go for a personal loan Canada debt to consolidate your loans.
Credit Card Balance Transfer
Credit card balance transfer allows you to transfer either the whole outstanding balance on your credit card or a fraction of your available credit card limit to your deposit account.
This can be an easy way to pay off your existing credit card debt since the transfer only involves filling out an application form and providing some information about your current cards.
With a balance transfer, you get a 0% p.a interest rate for the balance transferred which lasts between six and 12 months. After this period, the interest rates revert to normal.
This means that you may have up to one year to try and pay off the transferred balance at 0% interest rate.
When Might a Credit Card Balance Transfer Be the Best Option?
In most cases, it makes sense to take advantage of balance transfer if your debt is relatively small and you are confident you can pay it off in its entirety before the 0% intro APR period lapses. This way, you avoid paying the high-interest rate charged on credit card balance.
Although you can theoretically still obtain another balance transfer afterwards, that is not a smart thing to do.
Balance transfer can also be a great option if you want to start enjoying the flexibility of making new purchases since many cards with balance transfer option have excellent 0% intro APR periods for almost all new purchases.
A personal loan is a simple loan you take for personal use. In most cases, a personal loan will be unsecured, which means that you don’t have to provide collateral to get approved. Personal loans can be a great option for consolidating high debt balances or balances from different lenders.
Unlike credit cards, personal loans have higher limits and will force you to commit to a pre-planned loan repayment schedule.
For instance, if you obtain a 48-month personal loan debt, you will be expected to repay it in full within that timeframe. Fortunately, most personal loans have relatively longer repayment periods, and you can still use them to improve your credit score.
When Might a Personal Loan Be the Best Option?
A personal loan is an excellent option for individuals who are not certain of their ability to pay off their debt within the 0% APR window.
It is also a good option for anyone who may be tempted to simply make the minimum payment on a balance transfer credit card.
Lastly, a personal loan can be the right option if you have more than just a credit card balance to consolidate.