Choosing a credit balance transfer or a personal loan
First and foremost, why are you looking at consolidating your debts?
You might simply be looking to make your finances more manageable. Maybe you want to consolidate debts to free up cash to buy a new car or another big-ticket purchase. Perhaps you’re keen to get on the property ladder in the next few years, and debt consolidation is the first step on that journey.
When it comes to consolidating credit card debts, you’ll typically find yourself with the choice between consolidating onto a balance transfer credit card or using a personal loan. Whatever option you choose, you’re undoubtedly looking to consolidate your debts quickly so you can get moving towards your financial objectives.
While the best approach will be specific to your circumstances and needs, the considerations you should make are essentially the same.
Using a personal loan to consolidate your debts
The personal loans landscape has changed significantly in recent years. The market is more competitive, giving you a wider choice of lenders and loan products. And, features like our own Get My Rate mean you can discover if you’re eligible for a loan and what your interest rate will be before you apply.
Knowing what you’ll pay after consolidating your debts is vital. You want debt consolidation to improve your interest rate, reduce your payments, and shorten the time it takes you to become debt-free. Getting your rate before you apply means you can knowingly tick all those boxes without affecting your credit score!
We already mentioned a handful of potential benefits above, but what are the others?
What are the potential benefits of using a personal loan for debt consolidation?
Personal loans can be ideal for consolidating high balances or if you are looking to consolidate several credit card accounts. Also, debt consolidation loans give you a “debt-free” date as you’ll be making consistent payments over a defined time period. Contrast this to a credit card where you’re making the minimum payment and have no idea when you’ll be debt-free!
Another big benefit is you might be able to use your personal loan to both consolidate debts and finance a big-ticket purchase like a car, and still have all the benefits of just one loan and repayment to manage.
A loan will typically give you a more suitable timeframe to pay off your debts than a credit card. For example, you could get a personal loan and pay it off over seven years. You’re never going to find a balance transfer credit card offering 0% interest for that long!
What are the potential drawbacks of using a personal loan for debt consolidation?
If high debt levels have affected your credit score, you might find it challenging to get a personal loan that significantly lowers your interest rate. You’ll always pay interest on a personal loan, although it at least won’t create revolving debt in the same way a credit card does.
You are locked into making the same minimum repayment each month. While this is great for budgeting, you might prefer the flexibility of choosing what to pay on a credit card. However with NOW Finance you can make as many additional repayments as you like, and even pay off your loan early with absolutely no fees for doing so. Not all personal loans offer that level of flexibility so be sure to check.
Using a credit card balance transfer to consolidate your debts
If you’ve been a credit card user for several years, you might already be familiar with using balance transfers, although you may not have thought of them as debt consolidation!
Most credit cards offer a promotional 0% interest period on balance transfers and some credit cards will also offer 0% interest period on purchases, which may be helpful if you’re looking to make a big-ticket purchase. However, be aware that you’ll generally pay a fee for the privilege of making a balance transfer.
You’re unlikely to get a starting credit limit that is anywhere near what you could borrow via a personal loan. This may limit the debts you can consolidate and potentially making a big-ticket purchase unaffordable.
0% promotional balance transfer rates will usually last 24 months at the very most and can be much shorter. Once the promotional period expires, you could end up in a worse position than previously, depending on the interest rate and the payments you’ve made, if you can’t consolidate again.
It can be challenging to have the discipline to pay more than the minimum payment each month, increasing the risk of a significant balance at the end of the promotion.
Is a balance transfer or a personal loan best for debt consolidation?
It all depends on you!
There are likely to be specific circumstances that dictate whether one approach or the other may be best. Using a balance transfer may be a better approach if you have only a smaller amount of debt, and your existing debt is on other credit cards.
In contrast, a personal loan could help you consolidate higher balances, a greater variety of debt types, and may also give you some flexibility around having the finance to fund a big-ticket purchase like a car at the same time.
Consolidate your debt quickly with a no-fee loan from NOW Finance
All NOW Finance personal loans are fee-free, adding even more value and benefits to your debt consolidation!
Discover whether you’re eligible for a personal loan and get your interest rate before you apply. Getting your rate won’t affect your credit score, and you’re under no obligation to apply. However, if you decide to go ahead, you could have your loan settled and debts consolidated in a matter of days!
Disclaimer: This article contains general comments and recommendations only. This article has been prepared without taking account of your objectives, financial situation or needs. Before taking any action you should consider the appropriateness of the comments made in the article, having regard to your objectives, financial situation and needs. If this article relates to the acquisition, or possible acquisition, of a particular credit product you should obtain and consider the relevant disclosure documents before applying for the product. The information in this article is considered to be true and correct at the date of publication, changes in circumstances after the time of publication may affect the accuracy of the information.