If you have multiple credit cards with higher than average interest rates, you may be considering a balance transfer or personal loan to help you. By using either one of these tools, you can pay a significant amount less in interest on a debt. You may also have the opportunity to consolidate all your debts into a single loan to make life easier to manage.
However, if you are in a tough financial spot, you need to ask yourself a series of questions in order to find out if a balance transfer or a personal loan is right for you.
If you have multiple debts, a personal loan may be your best bet since you will just receive cash in your bank account to help you pay off the debts. Typically, balance transfers that are offered by credit card companies have a limitation on types of debts. Most balance transfers also require that the debt being transferred comes from another credit card provider.
What About Interest?
Interest is essentially the cost of borrowing money. Usually, a balance transfer will have the lowest cost. You can even try to pay off all the debt before the 0% APR rate jumps up. If you are unable to repay the debt during the introductory period, you may be charged a massive amount of interest.
Most personal loans do not have introductory offers, and you will most likely be required to pay interest right after the loan is in your account. However, if you shop around, you could find a personal loan with an extremely low-interest rate. If you know that you cannot repay the debt within the balance transfers introductory period, a personal loan may be right for you.
What are the Fees?
When completing a balance transfer, the credit card company will charge a fee of 2-5% of the total balance. Personal loans will also have an origination fee which can vary from a fixed cash amount to a percentage of the loan. Be certain to read your entire contract as some lenders will have explicit penalties for early repayment.
What About My Credit?
When you apply for a credit card balance transfer or a personal loan, your credit will be affected. In both cases, the lenders will perform a hard credit inquiry, which can leave a small ding on your score and stay on your credit report for up to 2 years. However, hard inquiries only account for 10% of your total score.
All in all, your financial situation will dictate if a personal loan or balance transfer is best for you. Be sure to read all the fine print on any contract you sign and to be fully aware of any fees and penalties you can be charged. Taking on a personal loan or balance transfer is an immense responsibility, so its best to be certain you are ready.