Debt consolidation loans and balance transfer cards are two options that can make repaying debt more manageable.
A debt consolidation loan allows you to take out a loan to repay your various debts, while a balance transfer card lets you transfer your credit card balances to one card — often with a temporary 0% interest rate — and have a single monthly payment.
With a debt consolidation loan, a type of unsecured personal loan, you combine multiple sources of debt into one easy-to-manage loan with a fixed monthly payment. You receive a lump sum of money upfront, then repay the loan over a set term. If you’re struggling to keep up with multiple payments and due dates every month, you may find having just one loan to repay much more convenient.
Debt consolidation loans can potentially come with lower interest rates than the ones you currently pay. As a result, you may save a considerable amount of money each month, which can make it easier to pay off your debt. If you can wait a bit, boosting your credit score before applying for a debt consolidation loan can improve your odds of qualifying for a lower rate.
It’s a good idea to compare different debt consolidation loan options to find the lender with the best rates and terms for your financial situation. Some lenders charge an origination fee for processing your loan, which can be as high as 10% of your loan amount. You may also come across late fees and prepayment penalties, so review the terms carefully before signing the loan agreement.
There are some advantages and disadvantages to debt consolidation loans, including:
With a balance transfer credit card, you transfer your existing credit card balances to a new credit card or one you already have. This can be a great way to potentially save money on interest, as many credit card companies offer introductory 0% interest rates on new balance transfer cards. These promotional periods can often last up to 21 months or more.
If you’re able to repay your credit card debt during the promotional period, you can save a lot of money on interest. However, once the promotional period ends, the interest rate on your balance transfer card will increase to its regular rate. This rate may be higher than the rate you were paying on your old cards, which can make your payments higher if you still have a balance.
Additionally, when you transfer a balance to a new card, you usually must pay a balance transfer fee, which can be a percentage of the amount you transfer or a flat fee. This fee may negate any benefit you get from the card, so keep this in mind.
Finally, if you’re over 60 days late on a payment, your card issuer may increase your interest rate on both new balances and your transferred balance, which can make it even more difficult to pay off your debt.
There are also benefits and downsides to using a balance transfer card to consolidate credit card debt:
A debt consolidation loan may make sense if it has a lower interest rate than your current debt payments. If you have a less-than-ideal credit score and can’t qualify for a low-interest rate, it may not be worth it.
If you’re able to pay off your debt during the 0% interest introductory period, a balance transfer card can be a great option. However, if that’s not feasible and the card has an expensive balance transfer fee, this may not be the best solution.
If you decide that neither a balance transfer card nor a debt consolidation loan is the right choice for you, these are some alternatives you can pursue to get out of debt: