Personal Loan or Credit Card Cash Advance?

[Aug 31, 2009.]

 

People looking for debt consolidation strategies often turn to loans to combine their debts. In cases where someone has several credit card balances or other debts, a personal loan could allow him or her to lower the overall interest rate and monthly payments.  But what about that credit card offer that came in the mail with a low interest rate for transferring a balance? Here are some things to consider when choosing between personal loans and credit card advances for debt consolidation.

Unsecured Personal Loans

If no collateral is required, the money being lent is an unsecured personal loan. Because banks are assuming more risk with unsecured loans, interest rates are generally higher than on those that are secured. Although personal loans usually have a lower interest rate than credit cards, some cash advance offers may beat those interest rates—for a period of time.

How Long Does the Interest Rate Last?

Special rates for credit card cash advances are good only for a limited period of time, which can be anywhere from six months to a year. If a borrower feels confident she can pay off the transferred amount by the end of that teaser rate period, the credit card advance offer could be a good deal. But if she owes a lot of debt, it may be difficult to pay off the full amount before a higher interest rate kicks in on the card. Credit cards advances also have high fees and interest hikes that take effect if payments are late.

Personal Loan Can Offer Stable Payments

Personal loans can have fixed or adjustable rates.  Obviously, getting a fixed-rate loan makes more sense for someone who wants to know exactly what the payments will be each month. Borrowers who are employed and have good credit qualify for the best rates and terms. 

In some cases, a borrower may qualify for a personal loan of only a few thousand dollars. That may not help her out if she's carrying a significant amount of debt. U.S. households that had a credit card had outstanding card debt of $10,679 at the end of 2008, according to the Nilson Report.

The other thing to keep in mind with credit card advances is that just because someone receives an offer in the mail doesn't mean she qualifies for the best interest rate. Getting approved for the low teaser rate will depend upon her credit score.

Borrowing money isn't always the best solution to get out of debt, but it can be a useful strategy. Find and compare quotes for personal loans to determine if getting one can help consolidate debt.

 

About Author:

Francine L. Huff is a freelance journalist and the author of The 25-Day Money Makeover for Women. She has appeared on a variety of TV and radio shows.