What are the Differences Between them?
One major challenge many people have today is the ability to effectively manage their debts, especially when the debt is spread out through credit cards, personal loans, emergency loans, and sometimes student loans. Having high credit utilization can lower your credit score and potentially increase your stress levels. High levels of stress are not good for your overall health or financial health! Having debt can be overwhelming, but some methods can help you get back on track financially. Two main options that you may have are debt consolidation loans and balance transfer credit cards.
While these options can help you create a plan to tackle your debt and potentially reduce the amount of interest charges you will encounter, you must know how each option works, including the benefits and disanadvantages. Therefore, you can choose the option that fits your current financial situation and needs.
You don’t need a master’s degree in finance to understand both approaches! Just be sure to do your research and talk to the professionals to find out what is best for your situation. With a little education and some planning, you can make an informed decision and take control of your debt.
Let’s get started! You have a roadmap to financial freedom at your fingertips if you are willing to take the time to learn more about how debt consolidation loans and balance transfer cars work.
How Debt Consolidation Works
Instead of allocating your monthly income to several debt obligations, debt consolidation lets you take multiple debts and combine them into a single loan payment that you will repay over time until the balance reaches 0.
If you have many different loans or high balances on your credit cards, you can borrow a lump sum from a lender to pay off the existing debts. This new loan replaces the previous debts, leaving you to make only one monthly payment to the new lender. Use a title loan calculator to see how much you may be eligible to borrow and plan which expenses it will cover for consolidation.
Pros and Cons Of Debt Consolidation Loans
This approach has many advantages attached to it, but like many options, it also has disadvantages.
Pros
- You will only need to keep track and make one monthly payment.
- Longer repayment terms in some cases.
- If you have a decent credit score, you can access optimal interest rates.
- It’s an alternative way to pay down high-interest credit card debt.
Cons
- You may be tempted to use your paid-off credit cards after consolidating.
- Origination fees can increase the total cost of the loan.
- Longer terms may result in more interest paid over time.
How a Balance Transfer Card Works
A balance transfer card lets you take the amount you owe from one card and move it to a new card with a lower or even 0% interest as an introductory rate.
Ideally, you would pay the balance more quickly because no interest is charged. You may be able to transfer other loan balances to these cards, too.
Pros and Cons of Balance Transfer
Balance transfer also has its advantages and disadvantages, as seen below.
Pros
- The 0% introductory Annual Percentage Rate (APR) lets you pay off the transferred balance without additional interest charges during the initial period.
- It’s easier to manage and track debts if they are on one single card.
- You can choose how much debt to transfer to the new card, which helps you retain your existing credit cards for other purchases and emergencies.
Cons
- 0% APR period is typically limited to 6 to 24 months
- After each transfer, a 3% to 5% fee charge can add to the overall debt.
- It can harm your credit score, especially if you open multiple new accounts in a short amount of time.
Which Of The Two is the Right Fit For You?
Determining which option is better ultimately depends on your current financial situation and future goals.
A balance transfer is a good option if you only have credit card debt to pay off, qualify for a 0% promotional APR, and can pay off most or all of your balance during the promotional period.
On the other hand, a debt consolidation loan will be a go-to if you have a large amount of debt to sort or multiple debts spread across different types of credit cards and loans. A debt consolidation loan offers a fixed monthly payment and repayment schedule. Therefore, it is easier to build into your monthly budget.
