Got holiday debt? Compare balance transfer, personal loan


Got holiday debt? Compare balance transfer, personal loan
Got holiday debt? Compare balance transfer, personal loan

If you've overindulged with your holiday spending, taking out a personal loan or making a credit card balance transfer could help you slim down your debt.

"At Christmas and the holidays, people don't always act as prudently as they should with their finances," says Kevin Weeks, president of the Association of Independent Consumer Credit Counseling Agencies.

While both a credit card balance transfer and a personal loan can help you if you're looking at paying a mountain of credit card bills, it's important to remember "transferring money isn't the same as repaying money," Weeks says.

With a credit card balance transfer, you can transfer balances from one or more credit cards to another credit card. You'll then pay no interest or low interest on the amount you've transferred for a certain period of time, such as six or 12 months.

A personal loan is an unsecured loan that you can get from banks, credit unions or online lenders. You don't need to put up any collateral, and you can typically use the loans for any purpose.

The average rate for a 24-month personal loan was 9.83 percent in the third quarter of 2015, according to the Federal Reserve.

In comparison, the average rate on a balance transfer credit card was 14.15 percent, December 2015 survey found. Either rate would be a significant savings if you've racked up debt on a retail card. The average retail card APR on cards from the country's largest retailers was a whopping 23.43 percent.

Whether you choose a balance transfer or personal loan to aid you in paying down your debt depends on your own personal situation, and the terms of the offers you're eligible for. 

As with any credit products, the rates you'll pay for each will depend on your credit history and credit score, but this table compares average rates for two typical loans -- one for a $1,000 loan paid back in a year, the other for a $5,000 loan paid back in three years.

Loan type Amount Upfront fee Payback period Typical APR Monthly payment Total cost
Personal loan $1,000 None* 12 months 9.83%** $87.84 $1,054
Balance transfer $1,000 $30 (3%) 12 months 0% $85.83 $1,030
Personal loan $5,000 None* 3 years 9.83%** $160.94 $5,794
Balance transfer $5,000 $150 (3%) 3 years 0% for 12 months, then 14.15% for 24 months*** $157 $5,653

*Some lenders to charge a loan origination fee, others do not
**Based on Federal Reserve finding of 9.83% for a 24-month personal loan
***Based on balance transfer rate survey, December 2015. Monthly payment assumes the fee will be rolled into payments.

Balance transfers
You may be able to do a balance transfer with a credit card you already have, or you may have to apply for a new card.

You'll typically pay no interest or low interest on the amount of money you transfer, but you'll often pay a fee to transfer the money.

The typical fee is 3 percent of the amount you transfer. So if you want to transfer $5,000, you'd pay a $150 balance transfer fee.

Despite the fee, transferring your credit card balances can be worth it if you will pay no interest or little interest, says Melinda Opperman, spokeswoman for Springboard Nonprofit Consumer Credit Management Inc.

On occasion, you'll be able to do the transfer without paying a fee. Navy Federal Credit Union, for example, currently has a Go Rewards Visa or MasterCard that doesn't charge a fee if you make a balance transfer. You'll pay no interest for 12 months, and then the APR varies between 9.49 percent and 18 percent, depending on your creditworthiness.

Meanwhile, Bank of America has a Bank Americard Visa Card offering 0 percent interest on balance transfers for 18 months. After that time, the APR ranges from 10.99 percent to 20.99 percent. You pay a 3 percent balance transfer fee.

If you make purchases with these cards during the introductory period, you'll pay interest on the purchases.

"We certainly see the volume of balance transfers go up in January and February," as consumers work to pay off their holiday purchases and holiday travel, says Randy Hopper, vice president of credit cards and business optimization.

It's a way to avoid dipping into savings, while cutting your interest costs, Hopper says.

"You certainly can save money if you pay it off during that time" when no interest is charged, Weeks says.

The key is to have the entire balance paid before the promotional period ends.

"Be sure you set a drop-dead date when you know the card will be paid off," Opperman says. You also need to be sure not to ring up new debt on the card.

Personal loans
If you don't think you can pay off your entire debt during the interest-free period you're allotted with a credit card balance transfer, or you don't want to be tempted to charge more on your credit card, a personal loan might be the better choice for you.

Some consumers prefer knowing they'll pay a set amount for a set period of time at a fixed interest rate, says Dave Ledwell, vice president of consumer and business lending at Navy Federal.

Rates on the loans can vary widely from person to person and lender to lender. The most creditworthy customers may be offered rates of 6 percent or 7 percent, while in other cases rates may exceed 30 percent.

At Navy Federal, personal loan volume has soared by 17 percent in 2015, Ledwell says. "It's pretty remarkable."

Demand for personal loans is up nationwide, and many lenders have been aggressively marketing these products.

The number of consumers taking out personal loans has climbed by at least 2 million every year from 2010 to 2014, according to a report by the credit information bureau TransUnion.

The majority of loans are for five years or less, and loan amounts are typically for $10,000 or less, TransUnion found.

Ledwell says consumers like the fact the loans are easy to apply for, decisions are quickly made, and if you're approved, the funds are quickly deposited into their bank account.

But you need to be sure to read the details of the personal loan you're considering, as some charge an origination fee, which typically ranges from 1 to 5 percent of the amount of the loan.

One big advantage with personal loans is "you're not scrambling to pay them off within six months," Opperman says. "They don't have the gotcha factor" that balance transfers have.

Review your finances
TransUnion found that one-third of consumers who take out only one personal loan reduce their credit card balances by 20 percent or more. Less than a quarter run up higher credit card balances after taking a personal loan.

Regardless of whether you choose a credit card balance transfer or a personal loan, you need to take a good look at your finances and find ways to avoid piling up new debt.

"Make sure you're not stuck in a long-term problem," Opperman says.

See related: 9 things you should know about balance transfers

Published: January 20, 2016

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