Which can save you the most and make paying off debt easier?
While debt consolidation loans work well for reining in large amounts of debt, balance transfer credit cards can help you save even more if you can afford to pay off all of your debts over a short period of time.
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How do debt consolidation loans and balance transfer credit cards work?
Quick snapshot: Debt consolidation loan vs. balance transfer credit card
|Debt consolidation loan||Balance transfer credit card|
|How it works||Take out a term loan, use it to pay off multiple debts, then repay your debt consolidation loan.||Transfer your debts to a credit card and make monthly repayments until it’s paid off.|
|Costs||APR starting at 3.49% for duration of loan.||0% introductory APR on transferred debt, around 16% to 26% APR on purchases, plus a 3% to 5% transfer fee and an annual fee of up to $100.|
|Repayment time||Usually between three and seven years.||Indefinite, though introductory period typically lasts between six and 18 months.|
|What it’s great for||Paying off a large amount of debt over a long period of time with a lower interest rate.||Paying of debt quickly and avoiding paying interest.|
|Where it falls short||Won’t save you much if you have a small amount of debt you can afford to pay off in under a year.||Interest rates can spike to around 18% after the introductory period is up.|
|Compare offers now||Compare offers now|
Debt consolidation loan
A debt consolidation loan is a fixed-term personal loan that you take out to pay off multiple debts, typically personal loans and credit card debt. You then pay off your debt consolidation loan plus interest and fees with one monthly repayment.
Debt consolidation loans typically come with lower APRs than your original debts. You can sometimes find debt consolidation loans with APRs as low as 3.49%. Some debt consolidation loans also come with origination fees, usually between 1% and 3% of your loan amount. Lenders typically deduct the origination fee from your loan amount before you receive your funds, so make sure to ask for enough to cover your debts and the origination fee when applying.
Balance transfer credit card
A balance transfer credit card is another method of moving all of your debts into one place — this time a credit card. Once you sign up for a balance transfer credit card, your creditor pays off the balances of your debts, which can include credit cards, personal loans, medical bills and more. Then you make one-time repayments on the balance transfer credit card.
These credit cards often come with 0% APR introductory rates, meaning that you don’t have to pay interest or fees for the first six months to 18 months after you take out the card. This introductory rate allows you to save big on interest if you can pay off all or most of your debt in that time frame. They also often charge a transfer fee, usually 3% to 5% of the transfer amount.
When is a debt consolidation loan better than a balance transfer credit card?
Debt consolidation loans are often better when …
- You have a large amount of debt. Balance transfer credit cards come with credit limits, so you might not be able to fit all of your debts on to one. Even balance transfer credit cards with the highest credit limit might not be able to cover large amounts of debt like private student loans or tens of thousands of dollars in credit card debt.
- You can’t afford to repay your debt quickly. Debt consolidation loans give you more time to pay off your debt at a lower interest rate than balance transfer credit cards — meaning more affordable monthly repayments.
- You’re willing to put up collateral. You can get even lower rates if you apply for a secured debt consolidation loan, which you back by putting something up for collateral.
- You have bad credit. Qualifying for a balance transfer credit card with a credit limit high enough to repay your debts can be nearly impossible when you have a low credit score. You might have more success with a secured personal loan, which is generally a less expensive option for bad credit borrowers.
When is a balance transfer credit card the better option?
A balance transfer credit card might be a better option when …
- You can afford to pay off your debt fast. You can save more with a balance transfer credit card than a debt consolidation loan as long as you repay your debt before the introductory period expires.
- You’re consolidating credit card debt only. Balance transfer cards make the process seamless to pay off credit card balances from other issuers. Even though you can use a personal loan to consolidate credit card debt, you might find it simpler to transfer that balance to a new credit card.
- You’re willing to spend the time applying for new cards. Even if you aren’t able to repay your debt by the time your introductory period is over, you can always apply for a new balance transfer credit card and start all over again. Keep in mind that you need to maintain a good enough credit rating to qualify for a new balance transfer card.
4 questions to ask when weighing both options
Ask yourself the following questions to decide which is better for your financial situation:
- How much debt do I have?
Debt consolidation loans pack the biggest punch for large amounts of credit debt. Balance transfer credit cards are generally better for smaller amounts, due to credit limits and short 0% introductory periods.
- How much can I afford to pay each month?
Debt consolidation loans typically come with longer terms than balance transfer credit cards, making monthly repayments lower. Balance transfer credit cards can motivate you to get out of debt more quickly, however.
- How’s my credit score?
While you need strong credit to qualify for a balance transfer credit card or debt consolidation loan with competitive terms, there are more options for people with less-than-stellar credit in debt consolidation loans.
- Do I want another credit card?
Balance transfer credit cards only come with minimum monthly payments. You’ll have to do the math and stick to a personal plan to pay off your debt at once. Debt consolidation loans do that work for you, giving you one less thing to worry about.
Case study: Mindy gets out of debtSay there was a woman named Mindy. After college, her bills started becoming more and more difficult to keep track of as her balances grew. She also had a small procedure at a hospital and owed a couple thousand dollars in medical bills.
Her total debt added up to $11,000 with an average APR of 15%. She had a credit score of 790 — excellent credit — and expected to qualify for most loans.
She applied to prequalify for a balance transfer credit card and a personal loan that could be used for debt consolidation. Here’s how the offers compared:
|Debt consolidation loan||Balance transfer credit card|
|Time to pay off debt||3 years||12-month introductory period|
|Loan amount/credit limit||$11,000||$15,000|
|APR||6.03%||0% for introductory period, 18% after|
|Monthly payment||$334.64||$953.33 to pay off debt before intro period|
|Fees||No upfront fee||Balance transfer fee of 4% ($440)|
Though the balance transfer credit card was less expensive in the long run, Mindy couldn’t afford to pay over $950 a month to make that introductory period. She knew she could potentially cut this amount in half by applying for another balance transfer credit card before here limit was up. But she wasn’t willing to spend the time applying for another balance transfer credit card later.
Based on these two factors, she chose the debt consolidation loan.
If done right, both debt consolidation loans and balance transfer credit cards can help you organize your debt and save on interest. Debt consolidation loans are generally better for people with large amounts of debt that don’t mind paying a little more in the long run for lower monthly payments. Balance transfer credit cards are often best for organizing a small amount of debt that you can afford to pay off over a short period of time.