Transfers between balances and personal loans: what is the difference?

In this article, we will compare balance transfers and personal loans and evaluate the pros and cons of each type of loan.

What are Balance Transfers?

Balance transfers allow you to move high-interest debt to a credit card that carries a lower interest rate. Usually, this lower interest rate lasts for six to twelve months before the standard interest begins to apply.

How Do Balance Transfers Work?

To take advantage of a credit card that offers balance transfers, look for a card offer that matches your credit score, read the card’s terms, and request the card issuer to transfer your debt to the new card. Often, you can do this online. You will receive a new card with the balance you transferred along with the balance transfer fees from the card issuer. Now you will have only one bill to track, making it easier to manage your monthly payments.

Fees

Check if you have to pay fees to transfer balances. Costs typically range from about 3% to 5% of the amount you transfer, or a flat fee, such as $20. However, some balance transfer cards charge fees if you transfer balances to the new card within a certain number of days of opening the card.

Interest Rates

The best interest rates are available to customers with good or excellent credit. You may see attractive annual percentage rate offers advertised, but you may not qualify for them. Do not apply until you assess what the card issuer offers after reviewing your credit report.

Credit Impact

Balance transfers may negatively affect your credit, though this effect is not always permanent. Each time you apply for a new balance transfer card, lenders perform a hard inquiry on your credit, resulting in a temporary drop in your credit score by about five points. New credit accounts for 10% of your credit score, so you might not want to open a balance transfer card if you’ve recently opened many other credit accounts.

What are Personal Loans for Debt Consolidation?

In addition to using a credit card for balance transfers, you can also take out a personal loan for debt consolidation, which is a new loan you take to pay off existing debts.

Fees

You may or may not pay any upfront fees for personal loans. With some loans, you will see clear costs such as processing and origination fees. With other loans, the costs will be built into the interest rate or may start to apply later in the loan term. Compare multiple loans to find the right balance between upfront fees and interest rates that suit you best.

Interest Rates

The rate you pay will depend on your credit and the type of loan you are using. You will need at least a “good” credit score, but the higher your score, the better your chances of securing a lower interest rate overall.

Credit Impact

Like balance transfer cards, new loans require a hard inquiry that can impact your credit scores, at least in the short term. In the long run, some debt consolidation loans may be better for your credit than balance transfers. On the flip side, late payments on the loan could negatively impact your credit score.

Collateral

Debt consolidation loans can carry additional risks. If it’s a secured loan, you will have to provide collateral, meaning you give the lender permission to seize or take your assets and sell them if you are unable to repay the loan.

Consolidating Student Loans

If

You had student loans, do some research before consolidating those loans. Federal loans offer unique benefits like the possibility of deferment or the option to allow you to pause payments. If you consolidate loans with a private lender, you may lose access to those beneficial borrower features.

Balance Transfer vs Personal Loan

Both options impact consolidating multiple debts into one debt, making payments more manageable. As long as you get more favorable terms from a balance transfer or a loan, such as lower interest rates or smaller payments, either option can also make your payments more affordable.

The best option for you depends on the terms you receive, your repayment plan, and your comfort level with the risks involved. A balance transfer is preferable if you receive a 0% introductory annual interest rate and can pay off the balance before that period ends. As an unsecured credit card, it also carries low risks – your assets won’t be seized if you fail to repay.

A debt consolidation loan might be a better choice if you want to combine multiple personal loans into a single monthly payment or if you plan to repay the loan over a long period. However, if you choose a secured loan, you risk losing your assets if you cannot repay the loan.

Regardless of which option you choose, try to minimize new debt or avoid it while paying off a credit card with balance transfers or a debt consolidation loan to stay on track to eliminate debt.

Key Takeaways

Balance transfers allow you to move high-interest debt to a credit card with a low or 0% interest rate. Balance transfers can be a good option if you can pay off the debt during the introductory period.

Personal loans are an alternative to balance transfers. These loans may come with a fixed interest rate, making them a good choice for borrowers repaying over time.

Source: https://www.thebalancemoney.com/debt-consolidation-loan-or-balance-transfer-which-is-best-315601