Jury’s Out: Personal Loan To Pay Off Credit Cards or Balance Transfer?

personal loan to pay off credit card debt
Photo courtesy of Paul Sableman via flickr. Used under a CC BY 2.0 license.

Many consumers are looking for ways to save money while paying down debt in today’s economy.

One way is to consider completing a balance transfer or taking out a personal loan to pay off credit card debt.  Another is a balance transfer, which is simply transferring the balance of one credit card to another card.

Both are good ideas used in the right situations and can help you pay down debt. Let’s take at look at balance transfers first, then consider personal loans. By then, you should be able to decide for yourself what you need to do.

Dig deep: Find the source of the balance transfer

Who are the balance transfer offers from? If you already have an account with the offering company then this could prove to be a bit tricky when trying to figure out the introductory APR and the portion of the balance it will apply to.

Cardholders would want to know which portion of the balance any monthly payments are being applied to. Will it be the transfer portion or the original balance?

In addition, some credit cards offer a rewards program that points can be earned.

It would be important to know if a balance transfer would be included on accumulating rewards points or not.

Some cards may allow for rewards points to be earned on any transfers; however, not all do.

Get your calculator handy

You should do the math when considering a balance transfer or a personal loan. First, take a look at the length of the introductory period on the credit card.

If you can foresee your ability to pay off the balance in full before the introductory period ends then it may not be a bad offer.

However, you must be aware what the interest rate will jump to once that introductory period is over.

Also, you may want to know prior to any balance transfer if the balance is not paid in full during the introductory period then which amount will the new APR be charged to.

Some cards may only charge the new interest rate on the remaining balance; however, some credit card companies may charge the new rate on the original balance amount. If that is the case then it may not save any money and could cause additional stress.

Is there a transfer fee?

Some credit cards either offer a flat transfer cost or it would be a percentage of the total transfer amount.

For example, if the balance transfer amount is $5,000 and there is a 3% transfer fee, that will equal out to be $150.

It is important to know if the accumulated fees associated with the transfer outweigh the savings from completing it.

That might affect the desire to complete the balance transfer. As a consumer that is considering a balance transfer, the ultimate goal is to pay down the debt faster and not just shuffle debt around from card to card.

Make sure that if a balance transfer is chosen by the consumer that the entire debt can be transferred.

If the card holder applies for a balance transfer and the approved credit limit is less than the total balance amount then it may not be a good idea.

The purpose of completing a balance transfer is to shift the debt from a higher interest rate credit card to one that has a lower APR.

So by simply not transferring the entire balance, the cardholder may not be saving any money in the long run.

Personal loan to pay off credit cards

Now, let’s look at the possibility of taking out a personal loan to pay down a credit card debt.

Note what the annual interest rate on the loan will be and consider shopping around at several different banks to get the best rate.

If it is higher than what the current credit card APR is or what the transfer balance rate will be, then it may not be worth it.

Next, the amount of the monthly loan payment should be taken into consideration. If the monthly payment is too much and cannot be afforded then a personal loan may not be the best option. It is wise to not enter into any loan agreement that cannot be afforded.

Be aware that by taking out a personal loan or completing a balance transfer, only shifts the debt.

The debt does not disappear and is not satisfied. The consumer is simply moving whom the debt is payable to.

It might be possible to save money in the long run with either a balance transfer or a personal loan; however, make sure that you can afford whichever option you choose.

Because not being able to complete the payment in full during the introductory period may make the balance transfer worthless.

In addition, if the personal loan route is chosen and the loan holder cannot afford the monthly payments and defaults on the loan then the outcome could be much more damaging to the credit report.

I hope this helps you with either a balance transfer or a personal loan to pay off credit cards.

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