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Personal Loan vs. Credit Card Balance Transfer for Debt Consolidation

[Jul 20, 2009.]


One way to pay off credit cards faster is to consolidate them to get a better interest rate and lower monthly payments. Borrowers can use a credit card balance transfer to do this, but in many cases a personal loan may be a better choice. Here's why.

Loan Payments Are Fixed

Many credit card transfer offers have a low, introductory interest rate that is only good for a certain number of months. So once that period ends the borrower would be stuck with a higher interest rate or have to find another transfer offer. Fixed-rate personal loans would allow a person to have stable monthly payments over the life of the loan. Some personal loans have variable rates, but those rates would still be lower than with many credit cards.

Secured vs. Unsecured Personal Loans

Borrowers may also have the option of choosing between secured and unsecured personal loans. An unsecured loan doesn't require a borrower to put up any collateral. But when a person agrees to put up collateral with a secured loan, he or she may be rewarded with a lower interest rate. Credit card balance transfers don't involve collateral.  

Penalties and Fees

Borrowing money from any lender isn't going to occur without some strings. Credit card balance transfers are generally regarded as cash advances and borrowers may pay cash advance fees. In some cases, lenders will offer a fee-free introductory cash advance when a borrower accepts a new card. But even though an individual may receive a low-interest balance transfer offer in the mail, that doesn't mean she has a high enough credit score to qualify for that rate.

Borrowers also will get hit with late fees if they miss payment deadlines on credit cards and loans. But if they are late with credit card payments, they're also looking at having interest rates automatically increased to default rates that could be as high as 36%.

Credit Scores Matter

Whether borrowers choose personal loans or balance transfer offers, credit scores count. Many lenders are only offering their best rates to people with credit scores of 720 and up. The average credit score of Americans was 674 in May, according to a study by Credit Karma. It's important to review credit reports before applying for loans to correct any inaccuracies or outdated information.

Borrowers can shop for personal loans from our network of trusted lenders. Whether a person chooses a loan or a balance transfer offer, it's important to compare deals and read the fine print to understand all the terms and conditions.


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.

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