Should You Get a Balance Transfer or a Debt Consolidation Loan?

Many people struggle with debt, and for all kinds of reasons. If you’re in this boat, you probably want to find a way out. Fortunately, consolidating your obligations can potentially help you beat them. Here are some things to consider when deciding between a balance transfer and a debt consolidation loan.

What Is Debt Consolidation?

Debt consolidation is essentially what the name implies: a way to combine many debts into one. There are a few benefits to consolidating debt:

- Most debt consolidation strategies involve lowering your interest rate in order to make repayment more manageable.

- Your repayment will be less confusing because you’ll only have to worry about paying one account.

- You can likely improve your credit score by consolidating your debt. Making timely payments is a huge factor in determining your credit score. Doing this through some form of debt consolidation will help your credit.

It’s important to note you can only consolidate certain kinds of debt and typically unsecured loans. This means you can’t consolidate mortgages or auto loans. Now that you have a bit of background on debt consolidation, it’s time to look deeper at two of its most common forms—balance transfers and consolidated loans.

What Is a Balance Transfer?

Credit card balance transfers take various credit card balances and move them over to a new account with a low introductory rate—often zero percent.

There are a few key things to know about credit card balance transfers though. First and foremost, that low introductory rate isn’t going to last forever. A lot of credit card companies today are offering zero percent rates for 18 months on balance transfers. You should always double-check the terms, however, before agreeing to anything.

While that 18 months might seem like a long time, it can go by in a flash—especially if you’re not using that time to proactively pay down your debt. Additionally, credit card balance transfers typically come with a fee in the range of three to five percent of the balance. It’s important to factor this into the cost before going through the transfer, as it might make things less affordable.

What Is a Consolidation Loan?

Another one of the debt consolidation options is consolidation loans. These can be offered through a debt relief program and work in a fairly straightforward manner.

The debt relief agency works with your creditors to determine a fair repayment plan. You will then have your debts bundled into one new loan held by the debt relief agency, which will then pay your lenders. This is beneficial for all parties, as your lenders want to get paid, you’ll get to pay them back without ruining your credit, and the debt relief agency can make some money in the process.

How to Decide Where a Balance Transfer or Consolidation is Better

Determining whether to go with a balance transfer or a consolidated loan comes down to a couple important factors:

- Do you think you can complete the process on your own? You won’t be getting any assistance with a balance transfer. Some people might find comfort in having a debt relief agency working alongside them.

- Will the amount you have to repay actually be lowered? Take the time to dig into the numbers you’ll end up paying through both options. If you need some assistance, speaking with a credit counseling service can help you get a clearer picture.

- Are you actually planning on paying these debts? If you don’t think a balance transfer or consolidation will actually help you regain control of your debt, it’s probably best to look for another option, potentially debt settlement or bankruptcy.

Many people can improve their finances through some form of debt consolidation. Consider the ways you might be able to improve your debt situation through a balance transfer or consolidated loan.