Should a consumer use a balance transfer versus a loan consolidation? There’s no question that balance transfers can seem attractive. When you’re managing the payment of a credit card with an 18% interest rate, and you get offered a balance transfer that drops that rate to 10% or even single-digits, that transfer looks very, very attractive. Anything that allows your payment to go farther and pay less interest can seem like a positive move.
Why a Loan Transfer Doesn’t Get Rid of Debt
A consolidated loan allows from one credit card to another is exactly that, just a transfer. The balance moves, part or whole, from one credit card company to another. And the attractive interest rate? It’s temporary. In most cases, these are teaser rates, and they are short-term windows that last, at most, maybe six months. After that, the new credit card account goes up to as much or even more in interest rate charges than before. So, now a consumer is back in the same situation or maybe worse. In the meantime, if the first credit card account wasn’t closed, there’s a high-risk new debt was added to it as well. That compounds the problem the consumer is in.
Why a Consolidation Loan Can Reduce Debt
The process of debt consolidation involves companies like Symple Lending taking multiple existing consumer loans and putting them together in one package and one new loan. All the existing debts are paid in full or as much as the , and the consolidated loan allows borrowers can also realize a lower fixed interest rate over the life of the new loan. This does two things: it lowers the cost of the interest charged, and it structures the debt payment into a flat, predictable payment. Assuming that the credit cards are then closed or not used, the debt at Symple Lending or similar now has a chance to decrease, slowly at first, but positively.
Which One is Better?
There is no perfect answer that is the same for everyone. There are definitely examples where people have found a transfer worked out better. And vice versa, others have found consolidation worked well for them too.
Each consumer should do their homework, compare notes and find the solution that works best for them. That said, the goal in any choice should be to start a process of reducing the debt, not adding to it. The cycle of debt is only broken when a consumer fully commits to actually starting to reduce what is owed once and for all.
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