Paying off all your debts will give you financial freedom. Two of the best options for your financial freedom are a personal loan and a balance transfer. Knowing the pros and cons of personal loan vs balance transfer can help you make an informed decision.
Personal Loan vs Balance Transfer
When you have multiple debts and are struggling to pay them off, you should go for debt consolidation. You can do this by getting a personal loan and paying off all your debt amounts. Then just continue paying the fixed monthly installments on one personal loan. This way, you will get rid of all your high-interest loans and deal with only one lower-interest loan.
If you are in a financial state to pay off debts quickly, then you should choose a balance transfer card with long introductory APR offers like 0% interest. But you will incur a transfer fee of 3% to 5%. In balance transfer, the repayment option is flexible; that is, you can pay the minimum amount when you are in tight budget and later pay more. So, if your monthly income is not fixed, a balance transfer is a better option for you. When you complete paying the debts, you will still have an open credit line that you can use in times of future financial difficulties. However, you can only consolidate your credit card debts with it; you can’t transfer the other unsecured debts that you might have.
When Personal Loan Is Better Than A Balance Transfer
If you have a huge amount of different types of debts and you need a structured and longer repayment plan, then applying for a personal loan would be better than a balance transfer. Here is a breakdown of situations when a personal loan is better than a balance transfer.
Seeking a Fixed Interest Rate And a Longer Repayment Period
A balance transfer offers you 0% APR, but for 12 to 24 months only. After this, you will have to pay a high and variable interest rate. A personal loan, on the other hand, offers a fixed-rate repayment plan with a specific date and a longer period. So, you will be able to better manage your monthly installments. A personal loan provides a budget-friendly option.
Lending a Large Amount of Money
In a balance transfer, your debts are transferred to a new credit card. However, a credit card only provides a limited amount of credit, which may not cover all your debt amount. With a personal loan, you can get a larger amount of money to borrow, sometimes more than $100,000.
Having a Diverse Debt Portfolio
If you have a diverse range of debts, then a balance transfer is not the right option, as it will only consolidate your credit card debts. With a personal loan, you can cover different types of debts like medical bills, credit card balances, and other unsecured loans.
Having a Fair Credit Score
If your credit score is fair, then you will have a higher chance of getting a personal loan than a new credit card for a balance transfer. You will need a good credit score to get a new credit card.
Boosting Credit Score
You can boost your credit score by diversifying your credit mix with a personal loan. If you only have credit cards and no other loans, then this time it would be better for you to take a personal loan.
For a balance transfer, you need to apply for a new credit card. This attempt will lower your credit score temporarily; your score will increase again after a few months. On the contrary, when you apply for a personal loan, your credit score will increase, especially if you only have credit cards and no installment loans like student, auto, or mortgage loans. Having a personal loan will diversify your loan portfolio, causing a boost in your credit score.
Conclusion
The decision regarding a personal loan vs balance transfer can be critical for your financial status. Remember that both of them offer you an opportunity to settle your debts. Bank transfer and personal loan will buy you a longer term or lower interest rate, but there is no way you will get out of it for free. You will have to repay the debt amount along with interest. If you don’t repay on time, you will get into a dangerous cycle of debt again.
