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Should you get a debt consolidation loan or a balance transfer credit card?

Jodie Humphries avatar
Jodie Humphries
- 5 min read
Should you get a debt consolidation loan or a balance transfer credit card?

Trying to manage multiple debts can become a financial burden that is too much for some people. If you’re looking for ways to lower this burden, you may consider consolidating multiple debts into a single loan or credit card. 

You can consolidate multiple loans into a single large loan, making it easier to manage and usually more cost-efficient. Alternatively, you can look for a credit card with a competitive balance transfer offer that could also be used to consolidate the debt.

Both these options work in a similar way. Deciding between a debt consolidation loan vs. a balance transfer credit card requires you to understand more about them. You should start by understanding the advantages of consolidating your debt and the different factors that must be considered to make an informed decision.

Why should you consolidate your debt?

There are several benefits of consolidating your debt, which include:

  • Streamlining the payments and paperwork. One repayment, one loan or credit card account to know the details of, including due dates, fee structures and other factors.

  • Save on fees and interest. Having a single debt means a single interest rate and only one account charged fees.

  • Opportunity for special deals. Some companies may offer an interest-free period if you opt for a balance transfer credit card. Or you may find a lower interest rate with a debt consolidation loan.
What factors should you consider when deciding between a credit card balance transfer vs. a debt consolidation loan?

There are many factors you need to consider when looking to consolidate debts. Here are a few key factors you should consider when deciding between a credit card balance transfer and a debt consolidation loan.

Loan terms

Balance transfer credit cards may offer an interest-free introductory period between six and 30 months. However, the interest rates after this period ends can be very high. On the other hand, debt consolidation loans usually have loan terms between 18 months and seven years. 

Over the loan term, if you have made timely repayments you will have paid off the loan balance in full, unlike with a balance transfer credit card which relies on self-management and good budgeting.  

Types of debts to be consolidated

You can typically only consolidate credit card debt with a balance transfer card. In comparison, a debt consolidation loan can be used to consolidate almost all types of debts, including car loans, personal loans, credit card debt, medical bills, and tax debt. 

Application process

The application process for both a balance transfer credit card and a debt consolidation loan can be done online in minutes. The approval process may take a few hours to a few days and varies between different providers and products.  

Setup and ongoing costs

Balance transfer credit cards may charge a 1-2% upfront setup fee and an annual fee. For debt consolidation loans, most lenders charge an application fee, which is refunded if your application is not approved. 

In terms of interest rates, you’ll find that balance transfer credit cards charge 0% interest for a fixed period, only to revert to a higher-than-average interest rate once any balance transfer period ends. Whereas a debt consolidation loan will charge interest on your loan repayments throughout the entire loan term. 

Managing repayments

You’ll be required to pay the minimum monthly repayment with a balance transfer credit card, but you can pay more to ensure the debt is paid off sooner. If you want to pay off the whole balance before the introductory period is over, you’ll need to pay more than the minimum and be very financially disciplined. On the other hand, a debt consolidation loan is repaid with regular repayments that don’t change unless the interest rate does. This makes it easier to budget for and pay off on time.

What are the pros and cons of a debt consolidation loan?

Benefits

  • Multiple types of debts can be consolidated.
  • Lower rate of interest when compared to balance transfer cards.
  • Easier financial planning as the entire loan is repaid within a predetermined period in regular repayments.

Drawbacks

  • You may pay an exit penalty if you repay the loan early.
  • Don’t tend to have any introductory interest-free periods.

What are the pros and cons of a balance transfer credit card?

Benefits

  • The card can be used for other regular purchases.
  • Possibility of accumulating reward points and other perks depending on the card you choose.
  • Often have introductory offers where no interest is charged, so if the entire balance is repaid in this time, you can save on interest.

Drawbacks

  • The interest rate can be very high after the introductory period ends.
  • There is no end date or specified loan term, which means you may take longer than intended to repay the entire balance.
  • The temptation to use the card for ongoing purchases which can add to your debt burden.
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The Bottomline

A balance transfer card may be suitable if you can repay the entire debt quickly. This is due to the common offers of interest-free periods. However, if you have higher debts to repay, you may prefer to repay them over a longer duration. This is where a debt consolidation loan may be a more appropriate choice. 

You should consider all the details of both options and your personal situation or seek expert advice to make an informed decision.

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Product database updated 21 Jul, 2024

This article was reviewed by Personal Finance Editor Alex Ritchie before it was published as part of RateCity's Fact Check process.