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Should you use a personal loan or a balance transfer credit card to pay off debt? We’ll give you the pros and cons, a few examples, and help you decide which is right for you.
Living with debt can make life more stressful than it needs to be, but that’s especially true if you have high interest, unsecured debt that creates a drag on your finances month after month. Since credit cards come with an average interest rate of more than 16%, paying down the principal of your balances each month isn’t always an easy feat. Heck, it can be hard enough to make the minimum payments on your credit cards each month, let alone pay anything extra.
For this reason and plenty of others, many consumers try to consolidate their debts with another financial product. Personal loans and balance transfer credit cards give debtors the potential to move all their debts into one place at a significantly lower interest rate. They can also go from paying multiple payments down to just one, which can make the process of paying off debt significantly easier.
Still, there are several big differences to consider when it comes to consolidating debt with a personal loan or a balance transfer credit card. If you’re ready to ditch debt but hope to use one of these products to expedite the process, you’ll want to read more before you decide between the two.
How Personal Loans Work
Personal loans are popular for debt consolidation for a few reasons, but it all starts with the fact you can qualify for a fixed interest rate, a fixed monthly payment, and a fixed repayment term that lets you know exactly when you’ll be debt-free. If you have good or excellent credit, you may even be able to qualify for an interest rate as low as 5.99%. With that kind of rate, it would be significantly easier to pay down debt and save a ton of money along the way.
How much could you save? Imagine you have $18,000 in credit card debt on a card with a 19% APR. If you were paying $400 per month, you would spend the next 80 months paying off your debt and you would pay $13,741 in interest in the process.
However, if you qualify for a personal loan with an interest rate of 6%, the entire story could play out much differently. With a personal loan at that rate, you could pay $347.99 per month for 60 months instead, become entirely debt-free, and pay only $2,879.40 along the way.
That’s more than $10,000 in interest savings, which is pretty crazy when you think about it!
Pros and Cons of Personal Loans
The example above makes it easy to see why someone might consolidate debt with a personal loan, but there are still some pros and cons to be aware of. Consider these advantages and disadvantages as you decide on the best way to consolidate your debts and pay them all off once and for all.
Pros of Personal Loans
- Get a fixed interest rate and fixed monthly payment that will never change.
- Fixed payments make debt repayment significantly easier to budget for.
- You can qualify for a much lower interest rate than you can get with a credit card.
- Personal loans are easy to apply for online.
- Consolidate all your debts into a single new loan with one monthly payment.
Cons of Personal Loans
- Some personal loan companies charge origination fees of up to 6% of the loan amount. However, loans offered through lending platforms such as Credible typically do not, so make sure to check each lender and compare.
- Personal loans only move your debt around (rather than eliminating it), so you could wind up in worse shape if you keep using your credit cards for bills.
- If you don’t have good credit, you may be stuck paying a higher APR than the lowest advertised rates.
Compare Personal Loans With Credible – Are you ready to pay off your credit cards and save money doing it? Credible helps you compare personal loan rates from multiple lenders in one place! Get started here.
How Balance Transfer Credit Cards Work
If you have credit card debt with high interest rates and you’re sick of dealing with it, you can also consider signing up for a balance transfer credit card. While this is another type of credit card, the way it works can easily leave you in a better place than when you started. That is, if you use your card responsibly.
With a balance transfer credit card, you can consolidate several debts into a single new credit card balance offering 0% APR for up to 21 months. This period without interest provides the perfect opportunity to pay down your debts, since every cent of your monthly payment will go directly toward paying off your debt balance.
Balance transfer credit cards don’t typically charge annual fees, and many of them let you earn rewards on your purchases to boot. But to really get ahead with a balance transfer credit card, you need to have a plan to pay off as much debt as possible during your card’s 0% APR introductory offer.
At the end of the day, balance transfer credit cards are usually best for consumers who don’t have a ton of debt to pay off due to the fact that you typically get 0% APR for just 12 to 21 months. Your interest rate will reset to the higher variable rate after that, so you need to keep in mind just how temporary the benefits from balance transfer credit cards can be.
As an example of how these cards work, the Citi® Diamond Preferred® Card comes with 0% APR on balance transfers for 21 months after the date of your first transfer. (Transfers must be made within the first 4 months after account opening.) It also comes with an intro 0% APR on purchases for the first 12 months after account opening. However, the rate will reset to the higher variable rate of 16.74%-26.74% after that. Further, a 5% balance transfer fee (minimum $5) applies.
Pros and Cons of Balance Transfer Credit Cards
Paying off debt at 0% APR comes with obvious advantages, but there are plenty of downsides that come with balance transfer credit cards. Here are the main advantages and disadvantages to consider with this strategy.
Pros of Balance Transfer Credit Cards
- You can pay off debt with 0% APR for a limited time.
- Every cent of your payment goes toward the principal of your balances during your card’s introductory period.
- These cards typically come with no annual fee, and some come with cash back or other rewards.
- Consolidate several high-interest debts in one place.
Cons of Balance Transfer Credit Cards
- Some balance transfer credit cards offer rewards on purchases that just entice you to rack up more debt.
- Most 0% APR offers are for just 12 to 21 months, which isn’t a lot of time to make progress on large debt balances.
- Many balance transfer credit cards charge an upfront balance transfer fee (normally 3% or 5% of your balance). However, some cards don’t charge this fee, so make sure to check and compare.
Find the Best Balance Transfer Credit Cards – Are you ready to destroy your debt? Say goodbye to high interest debt with a balance transfer credit card. Get started here.
Which One Is Right For You?
Should you consolidate debt with a personal loan or a balance transfer credit card? At the end of the day, it’s really up to you. However, you should keep in mind which option is likely best for your situation.
In our eyes, personal loans are usually best for:
- Consumers who want to stop using credit cards
- People who want to plan using a fixed interest rate and fixed monthly payment
- Anyone who has a large debt balance that’s going to take several years to pay off
Conversely, balance transfer credit cards are usually best for:
- People with smaller amounts of debt that they can pay off in 12, 18, or 21 months
- Anyone who doesn’t mind paying an upfront balance transfer fee to secure a 0% APR for a limited time
- Consumers who have the discipline to stop using credit cards for purchases
No matter what, you’ll have a better chance of getting out of debt if you approach your situation with a plan. With that in mind, make sure to think over your strategy and all it entails before you sign up for a balance transfer credit card or a personal loan.
These financial products can help make getting out of debt easier, but you have to be ready and willing to help yourself.
Have you used a personal loan or balance transfer card to successfully pay of debt? Tell us your story below!