Debt Consolidation Loan or Balance Transfer: Which Is More Suitable?

We all agree on one thing: paying off debt doesn’t come at an easy cost. Still, small payments and a low-interest rate can ease the path. When you attempt to pay off your debt in a given timeframe, two solutions are regularly proposed: debt consolidation loans or balance transfers.

Hence, which option should you select? As it is expected, each has a set of advantages and disadvantages. What you should do is analyze each of them and make an informed decision.

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Debt Consolidation Loans

As opposed to utilising credit cards, you may consider consolidating your loans. In other words, you’ll only have one loan that incorporates all your debts. Generally speaking, debt consolidation loans are featured by a fixed rate, which is much better than falling for a credit card promotion with a three-month expiration date.

  • Fees: You may or may not have to pay any extra fees when you choose debt consolidation loans. Some loans are linked to evident expenses such as origination or processing fees. Nonetheless, other loans don’t present such expenditures, as they are typically incorporated into the interest rate. Ideally, we advise you to examine in detail several loans to find the right combination of interest rate and up-front fees.
  • Interest rate: The interest rate will depend on the type of loan you select. For instance, a personal unsecured loan will present a higher rate in comparison with a home equity loan. Either way, presumably, you’ll end up paying a lower interest rate than standard credit card interest rates. You can choose between variable or fixed rates, depending on your situation and the loan itself.
  • Your credit: When you get a new loan, a new credit inquiry is made on your credit score. Nonetheless, considering the long-term scenario, choosing debt consolidation loans could be better than balance transfers. That’s because it suggests that you are committed to paying off your debt, which indicates your reliability as a borrower.

Balance Transfers

Moving on to balance transfers, this option is easy. It is highly recommended in the case in which you know for sure that you can pay off your debt right away. Nonetheless, it’s not all rainbows and sunshine. Other things should be noted, as well.

  • Fees: In the majority of cases, you’ll be required to pay a fee, which accounts for a given percent of the total borrowing sum.
  • Interest rate: As a general rule, convenient interest rates are available to borrowers who have a good credit record. You might observe attractive offers now and then, but before signing a deal, it’s best to review the conditions attentively.
  • Your credit: Even though balance transfers aren’t 100 percent bad for your credit, they can lead to some complications. Every time you send an application for a new credit card, lenders analyze your credit, and those inquiries will definitely leave a bad mark on your score.

And lastly, if you do choose this alternative, make sure that you keep track of all your spending and make sure you pay them all back in.

In order to make the best decision, it’s always a good idea to discuss with a specialist. He/she can offer you all the necessary information and help you choose the right option.