Dealing with credit card debt is not terribly uncommon for the average American. In fact, it may very well be one of the great American pastimes if the latest U.S. collective card debt of $1,021,693,940,000.00 is anything to go by. However, there are ways of dealing with this debt.
Chief among these are personal loans and balance transfer credit cards. Each offers a way out of mounting credit card debt, but they both come with their own traits. Some people like to resort to the personal loan for credit card debt while others prefer balance transfer cards for smaller amounts of debt.
If you’re stuck trying to figure out if you should join Team Unsecured (loans) or Team Plastic (cards), don’t worry. Our in-depth breakdown will help you decide when it comes to personal loan vs. credit card.
Personal loan vs. credit card: Depends on interest
While there are many deciding factors in the debate of personal loan vs. credit card, the biggest one is undoubtedly interest. When you charge something to a credit card, you’re expected to pay that amount back. However, should you neglect to pay or only pay a portion, then you will still be expected to pay off the balance along with a percentage based on the amount owed.
Understanding the importance of interest can make all the difference when you’re deciding between a personal loan and a balance transfer credit card. After all, part of the reason you might be dealing with credit card debt is because of out-of-control interest on your outstanding balance. And while personal loans and balance transfer cards are possible solutions to this debt, these, too, come with their own interest rates.
As it stands, many balance transfer credit cards come with a grace period of sorts known as 0% intro APR. This means that, for a set period of time, you won’t have to pay any interest on a transferred balance. For some, this is a godsend as it gives them enough time to whittle away at credit card debt without prolonging the period through interest.
However, balance transfer credit cards are not always the best option – especially if your credit card debt is quite large. You may have to pay a balance transfer fee, often 3% to 5% of the money you transfer. That’s where a personal loan can help. While it’s true that interest rates can be higher on a personal loan, this is largely due to the fact that they are not backed by collateral. Rather, unsecured loan amounts and interest rates are based on your credit.
How personal loans work
When using a personal loan for credit card debt, it helps to understand a little about how they work. You can find these either with a bank or an online lender. Once you select a lender and you qualify for a loan, you typically receive the amount in one lump sum. You are then expected to pay it back within an agreed upon loan term.
Using a personal loan for credit card debt
One advantage to using a personal loan for credit card debt is that you get all the money upfront. Say you have an outstanding balance of $5,000 and you take out a personal loan for that same amount. You now have the money in hand to pay the creditor in full.
However, you are still expected to repay the loan. The difference here, though, is that you have a set end date or loan term. That means you can pay off your personal loan on the agreed upon monthly rate with a date of completion. If your loan features fixed interest rates, you won’t have to worry about fluctuating rates that could lengthen a loan term (or increase your monthly payments).
How balance transfer credit cards work
Balance transfer credit cards allow you to transfer an existing balance into another account. However, this is more than a mere transference of debt. Most balance transfer credit cards come with 0% intro APR for months and even years. This means that you can work on paying off that transferred balance without dealing with interest during that grace period.
Using a balance transfer card for credit card debt
Generally, you only want to resort to a balance transfer credit card if your card debt is too small to warrant a personal loan. While many of these cards come with a decent-length window of 0% intro APR, a balance transfer credit card is still a credit card. That means that, unlike with a personal loan, you can still add additional debt to your outstanding balance.
5 questions to help you decide
Here are some questions to ask yourself when choosing a winner for personal loan vs credit card:
How much do you need to borrow?
If the amount you owe is less than a thousand dollars, then you probably don’t need a personal loan for credit card debt. In the end, you could end up paying more in interest. Instead, a balance transfer credit card with a generous 0% intro APR should suffice.
How long will it take you to pay off the debt?
If you are in a financial position where you would benefit from smaller monthly payments, then it will take you longer to trim that credit card debt. In that case, a personal loan could offer you better loan terms.
How good is your credit?
Having good credit will make getting a personal loan even easier. Unsecured personal loans aren’t backed by collateral, so it’s your credit that will largely determine your loan term and interest rates.
Do you need cash upfront?
If you need cash upfront to pay your creditor, then a personal loan is the way to go.
Do you tend to overspend?
Be honest: do you do a lot of impulse buying? A balance transfer credit card might not be the best remedy for handling your credit card debt. After all, it is a credit card and you might be tempted to add to your existing debt, thereby prolonging your time spent paying it off.
The bottom line
In the matter of personal loan vs credit card, everyone has their favorite. Both options are valid ways of dealing with debt. You can use a personal loan for credit card debt just as easily as you would use a balance transfer card. However, there are factors to consider. For example, if your outstanding balance is at a manageable amount, it might not make sense to use a balance transfer card. And, if you’re in need of funding sooner than later, a personal loan could help. It’s up to you to decide.