Debt Consolidation Loan vs Credit Card Balance Transfer
When you default on paying credit card bills or loan EMIs on or before the due date, the interest accumulates, making it harder for you to pay your debt. There are 2 effective ways by which you can clear your personal loan or credit card debt:
Using either of these 2 ways, you can manage your debt at a lower cost.
What are debt consolidation loans?
With a debt consolidation loan, you can consolidate smaller loans into one loan. In such a case, your total loan repayment cost will be lower than what you are currently paying in interests for several individual loans put together. Debt consolidation loans are personal loans offered by banks in Singapore to help you repay your debts at a lower interest rate. Listed below are the features of a debt consolidation loan:
- Loan tenure: Based on your loan repayment period, the interest rate will vary. The interest rate will be lower for a long loan tenure than a short tenure.
- Interest rate: Depending on the type of loan you opt for such as home equity loans or personal loans, the interest rate will be lower or higher and fixed or variable.
- Fees: Some banks may charge an origination or processing fee for a consolidation loan.
- Credit score: Your credit score will improve if you branch out into a combination of credit card and loan payments instead of using just multiple credit cards for your payment history.
- Collateral: You may have to put your asset or assets as collateral to convert unsecured loans into secured loans which may be a risky move. Therefore, always compare various debt consolidation loans before choosing the one that best suits your needs.
What is balance transfer?
With a balance transfer plan, the cardholder can transfer all the outstanding credit card debts from other accounts to a single account for lower interest rates. In Singapore, most card issuers offer balance transfer plans with a 0% interest rate for the initial period of 3 months to 1 year. After the interest-free period, the interest rate will rise as high as 19% p.a. Listed below are the features of a balance transfer plan:
- Credit limit: The credit limit of a balance transfer plan depends on the credit card or credit line account that it is tied to. A cardholder can borrow a maximum amount up to 4 times his or her monthly salary.
- Interest-free period: The balance transfer plans in Singapore come with a 0% interest rate for a period of 3 months to 1 year.
- Interest rate: After the interest-free period, the interest rate is bound to increase to 19-26% p.a.
- Processing fees: Banks charge a processing fee of 1-5% for balance transfer credit cards based on the transfer amount and tenure.
- Minimum monthly payment: Cardholders have to make a minimum payment ranging from 1-3% of the outstanding balance each month.
- Late payment fees: Cardholders who default on making minimum monthly payments will be charged a late payment fee of S$60 to S$125 as it varies with each bank.
Tips to use balance transfer plans to clear your credit card debts
Following are some useful tips to effectively use your balance transfer account to get rid of your debt:
- A balance transfer plan (BTP) can be in the form of a credit card or a credit line that gives you the opportunity to borrow more. However, it is advisable not to use the BTP for anything other than paying off your personal loan or credit card debt.
- Make it a point to pay off your debt within the interest-free period or else you will end up paying higher interest as much as 19-26% p.a.
- Ensure you can pay the minimum monthly amount which is 1-3% of the balance transfer amount. You will be charged a late payment fee if you fail to make the minimum payments. Thus, rendering the interest-free period useless.
Tips to use debt consolidation loans to clear your debts
A debt consolidation loan is a tool that can help you manage your debts at a low cost. Listed below are some useful tips on how to use a debt consolidation loan to clear your debts at a lower cost:
- Compare the interest rates and tenure of different debt consolidation loans offered by various banks before choosing the one that best suits you.
- Transfer the highest interest loans to the debt consolidation loan so that you don’t have to pay more on interests.
- Set up automatic payments for your loan repayments on or before the due date so that you never have to pay late payment fees.
Debt consolidation loan vs balance transfer plan
Following are the differences between a debt consolidation loan and balance transfer:
|Debt consolidation loan
||Balance transfer plan
|You can consolidate several loans such as home equity loans and personal loans into one single loan with a lower interest rate.
||You can transfer the outstanding balance from one or more high interest rate credit cards to a single lower interest card.
|Some banks charge an origination fee for a personal consolidation loan.
||You will be charged a one-time processing fee for a balance transfer.
|If you don’t have a good track record of making minimum monthly payments, then opt for a consolidation loan. The repayment process becomes easier with a single loan.
||You will be charged a late payment fee for defaulting on minimum monthly payments. The interest-free period will be rendered useless in such a scenario.
|Debt consolidation loans come with a fixed interest rate.
||Balance transfers come with promotional interest rates for a period of 3 months to 1 year, and drastically increase from 0% p.a. to 19% p.a. after the interest-free period.
Balance transfers and debt consolidation loans are tools that can help you manage your debts at a lower cost. It is up to you, the cardholder or borrower as to how you repay all of your debts by making well-informed decisions and taking the relevant steps at the right time.