One of the ways to successfully manage your debt, and create a pay down plan, is to make use of a debt consolidation loan. It’s always important to carefully consider your options, and be careful when using debt to pay off other debt.
However, if you plan properly, and are careful to practice discipline, a balance transfer or a personal loan can be a good way to consolidate debt and make it easier to pay off. But which one is the better option? Should you only use one, or both as a way to get out of debt faster?
Jocelyn Baird, from NextAdvisor.com, points out that choosing the right method for you depends on where you stand, as well as the kind of debt you have.
Credit Card Balance Transfer
“A credit card balance transfer can be a great tool for managing your debt,” says Baird. It most helpful when you have debt you can pay off within the next nine to 12 months.
With a 0% APR introductory rate, a balance transfer credit card can help devote more of your payment toward principle reduction, and thus reduce what goes toward paying interest.
One thing to watch out for, warns Baird, is balance transfer fees that are charged by many credit card issuers. You should also note that it can be a huge shock to your pocketbook and a setback to your debt reduction plan if you can’t pay off your balance within the introductory period.
If you have more debt than can be paid off in that time period, it can make sense to look for a loan with a low, fixed interest rate.
Getting a personal loan for debt consolidation can make sense if you know you need more time to pay off what you owe. Additionally, this type of loan can be desirable if you have other debts, like medical bills, that need to be discharged, in addition to credit card debt.
“The rates offered by personal loan services are often lower than the average rate from a traditional loan, and even lower than credit card rates,” Baird points out.
Anytime you can get a lower interest rate, you’re better off, since you’ll be putting more of your payment toward reducing debt each month.
Which is Best for Debt Reduction?
The first step to determining if a credit card transfer or personal loan is best for paying off debt, is to figure out exactly what you owe, and how you can plan to pay it off. Then choose the type of debt consolidation loan that works for you and your debt needs.
It’s also worth noting you can get the best of both worlds. Consider using a balance transfer for a portion of your debt (a portion that you know you can pay off within the introductory period), and another type of loan for the rest. You’ll need to manage your payments so you can pay what’s necessary for both loans.
Even if you have to combine these debt consolidation techniques, and make payments on two loans, it’s still better than trying to make payments on five to seven loans, with varying interest rates that are likely to be much higher.
This will make your debts much more manageable and easier to pay off due to lower interest rates and combined payments.
Have you used debt consolidation to help manage your debt? What strategy do you think is a better choice?