Personal Loan or Credit Card? How to Choose The Right Option For You - MoneyTime

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Whether you have just the one line of credit or are balancing a number of different monthly debt payments, you might find yourself weighing up your need for a balance transfer credit card or a personal loan. 

Taking advantage of either strategy could help you slash the interest rate on your debt, or even consolidate your debts into a single loan so you have fewer plates to juggle. Maybe your credit card balance has been well-managed for some time now, and you’re ready to take advantage of some of the additional advantages offered by your provider.

Enter balance transfer cards. Balance transfer cards typically appeal to consumers because they tend to have a low introductory offer, as low as 0 percent APR, for a specific period of time. Starting off with a neutral credit card balance, you can transfer a host of debt onto your card in a bid to take advantage of additional benefits. 

Personal loans, on the other hand, are typically issued by banks, credit unions, and other non-traditional lenders at a much lower interest rate than that of a standard credit card. Typically, you’ll work to pay back the loan in monthly installments over a period of a few years until it is completely paid back; it is not uncommon, on the other hand, for people to never see their credit card balance return to green.

How can you know which option is best for you and your personal financial situation? We’re here to help.

The Advantages of a Personal Loan

Personal loans are great for consolidating high-interest debts or financing large expenses. They’re an especially good option if you have good to excellent credit, and feel confident that you can make monthly payments over the loan term.

Interest rates on personal loans can typically range from between 6% and 36%. Borrowers with good or great credit might be able to qualify for a personal loan at the lower end of this range, while those with poor to bad credit might be forced to sign on to higher interest rates. Borrowing limits on a personal loan can be quite high: up to $100,000 for qualified borrowers.

A personal loan is an installment loan, which means you get a lump sum payment into your bank account that you then repay via fixed monthly payments over a specific period of time. This period of time is typically between two and five years, but depending on how large a personal loan you are taking out, this might be longer. 

Many online lenders now let you pre-qualify for a personal loan in order to see estimated rates, with no impact on your actual credit score. Take advantage of this feature to get a good idea of how much a personal loan might cost you in the long-run.

Ultimately, personal loans are a good option for consolidating debt or financing large personal expenses due to their low rates, high borrow limits and fixed repayment terms.

The Advantages of a Credit Card Balance Transfer

credit card balance

A credit card is a great option if you need to finance smaller expenses and expect to be able to pay off your credit card balance in full each month. It also helps significantly if you qualify for a 0% promotional offer.

Credit cards are an expensive form of financing if you fail to pay off your credit card balance each month or fail to qualify for a card with a 0% interest promotion from the outset. Credit cards typically have interest rates in the double digits, and a high credit card balance can dramatically impact your credit score.

A credit card counts as a revolving form of credit that allows repeated access to funds. Rather than getting a lump sum of cash, your credit card has a limit that you can charge up to each month. Minimum monthly repayments are usually about 2% of your balance, though it is best to avoid interest charges by being careful to pay your credit card balance in full by the due date. 

Carrying higher rates and a high risk of burdening you with a high balance, credit cards are best designated for short-term financing strategies and purchases you expect to be able to pay in full, like daily and monthly expenses. 

Questions to Ask Yourself

Still not sure if a personal loan or credit card balance transfer is for you? Ask yourself these questions to narrow it down.

  1. What types of debt do you have?
    • If you plan to consolidate many types of debt, a personal loan offers you the most flexibility in that you will typically receive a lump sum in your bank account that you can use, as you wish, to repay your various lenders. 
    • Credit card balance transfers on the other hand, typically bring with them restrictions on what type of debt you are permitted to transfer to the card. While typically you can transfer credit card debt to your new credit card balance, some card-issuing financial institutions will require that the debt is transferred from a card issued by a competing company. In some cases, credit card balance transfers might accept student loans, automobile loans or mortgage debt, but this is not always the case. It makes sense to look into your options based on the kind of debt you are looking to manage.
  2. How much debt do you have? 
    • There is no guarantee that a credit card balance transfer or a personal loan will be enough to manage your current debts. Even if this is the case, however, a good place to start is to try paying off your debt with the highest interest.
  3. How much interest will you be expected to pay?
    • A credit card balance transfer might be the least expensive option for you if you are confident of being able to pay off your entire debt before the introductory APR period ends. If you fail to repay all your debt, on the other hand, you face accruing interest on your remaining credit card balance at the cards default APR. This tends to be anywhere between 12% and 23%, variable based on your credit rating. 
    • While personal loans rarely offer a zero interest promotion period, the interest rate on personal loans may be much lower in the long run that a credit card’s default APR rate. On average, you might expect to pay between five and ten percent interest on a fix-rate loan through a bank based on the terms of the loan and your personal financial profile.  
    • In contrast, recently the national average interest rate for a credit card has hovered around 15%.
  4. What fees are hiding in the background? 
    • Credit card balance transfers typically charge you a balance transfer fee of between three and five percent of the debt amount transferred, typically with a minimum fee of between $5 and $10. Some balance transfer cards have annual credit card fees in addition to this initial fee, so keep an eye out for the terms of your new credit card before you sign on the dotted line.
    • Personal loan lenders, on the other hand, might charge you a fee at the outset or a closing cost. This can be as much as $50 to $75 in a flat fee, or a one to five percent charge on the value of the loan. 
    • Depending on your lender, there might be an application fee, or a prepayment fee if you manage to repay your loan ahead of schedule. These fees typically vary between lenders, so it is definitely worth your while to do some comparisons between the loans on offer. 
  5. How will this strategy affect my credit rating? 
    • Applying for a new personal loan or credit card can affect your credit score in a number of ways. For example, applying for a new card or loan can hurt your credit initially has the lender is likely to perform a hard inquiry as it checks your credit report. An inquiry such as this will stay on your credit report for up to two years, although such inquiries typically only affect your score during the first year. 
    • On the other hand, having a range of credit card types can be a good thing for your credit. Credit cards are classified as revolving credit accounts. In contrast, personal loans are installment accounts. While a small factor in the overall determination of your credit score, having a mix of account types is considered a factor in calculations.
    • The reason for this is that a major factor in determining your credit score is calculating the amount of available credit that you use on your credit cards. This is your specific utilization rate. Credit-scoring calculations typically favor low utilization, and will likely look into your utilization on unique credit lines. 
    • Paying off the credit card balance on several credit cards and moving your debt to one new loan or credit line could help your credit by lowering your credit card utilization rate. Closing accounts that are paid off, on the other hand, could impact your credit negatively as your overall utilization rate increases. 
    • How you manage your new loan or credit card is obviously a vital factor to consider when assessing your future credit. A single missed payment on your credit report could have a substantial impact on your overall score. 
  6. What is my payment plan going to be? 
    • While a credit card balance transfer with a zero-interest promotional period may be the most inexpensive payment plan in the short run, your ability to repay your debt is key. You need to be disciplined enough to pay off your credit card balance in full before the promotional period is over, lest you get stuck with close to extortionate interest rates. 
    • Your monthly payment on a personal loan, on the other hand, might be higher than the minimum payment required on your new credit card. This could lead to cash-flow issues in your day-to-day life if you’re more used to lower credit card repayments. Even so, you’re likely to need to pay more than the minimum if you hope to pay off the card’s balance before the end of the promotional period. 
    • As a rule, calculate how much you need to pay off each month in order to repay the balance in full by the end of the promotional period; you can use a debt repayment calculator to do this. 

At the end of the day, personal loans and credit card balance transfers are just two financial tools available to you as you work to consolidate your debts or decrease the interest rate on your debt. Before choosing a loan or card, be realistic about your current and expected future financial circumstances, the fees on the options available to you, and the long-term effects on your credit rating.

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