Many people use balance transfer and debt consolidation interchangeably. Whilst these two things make getting out of debt faster than usual, you have to take note that they are two different things. Perhaps, the simplest way for you to understand the difference is to know that balance transfer is simply a type of debt consolidation. Debt consolidation, on the other hand, is a way of repaying all your loans using a single loan. That single loan will then be the one you will pay for later. What else are the differences between these two?
They are different in terms of how you can use them
A balance transfer, being a type of debt consolidation, is one that is applicable only to a certain type of debt, that is, credit card debt. Debt consolidation, being the more general option amongst the two, can be used to help you settle any type of debt that is not attached or secured by an asset.
This difference will help you reassess your situation. For instance, you owe a credit card debt amounting to $15,000 with an interest that is higher than the ones offered by other companies. Your option then is to use balance transfer so that you get to pay lower monthly amortisations on your credit card loan. In case you have other debts alongside your credit card debt, it is best to opt for debt consolidation.
They have different effects on your credit score
You cannot say that a balance transfer is better than debt consolidation or vice versa. Actually, no one type of mortgage is better than the other unless you become fully aware of how they affect your credit score. When credit score is a concern, you have to remember that the best thing to improve it is to make sure that you never default on your payments, whether you opt for balance transfer or debt consolidation. Lower your debt by paying the principal of your loan and the corresponding interest attached to it and for sure you will have a good credit standing.
This is a thing you should remember when it comes to credit scores, balance transfer and debt consolidation. Make sure you do not cancel your old accounts even when you have consolidated them in one debt. Closing them will affect the overall term of your credit history and will eventually affect your score. For a balance transfer, on the other hand, you have to consider the credit limits attached to the new account. Since both are new credit applications, they can affect your credit score no matter which one you choose.
Other things you should know about balance transfers
A balance transfer seems to be a feasible idea especially if you have heard of the lower interest rates attached to it. Whilst this is the case, there are a few other things to consider before availing one. Compare rates accordingly by taking every aspect of the transfer into account. There can be fees connected to the balance transfer so you better be aware of that.
This would then boil down to comparing a balance transfer with other opportunities like a cash advance or a personal loan. In all aspects of each type of loan, you should always consider how the loan will affect you not just now but in the long-term. You have to take into account that with the balance transfer, you may also use the amount left in your credit limit to make new purchases, in which case the interest rate can bring you back to the usual scenario.
Other things to know about debt consolidation
Debt consolidation, meanwhile, is available in two types. One is the secured loan where you get the chance to use your asset to back it. Anything from a vehicle to a home and even your very own retirement fund can be used for the purpose. The other type is known as an unsecured loan that does not need any collateral but has a higher interest over a secured loan. These debt consolidation types are classified further into different types, each with different purposes and varying requirements in some cases.
Working with a debt consolidation lender
It is necessary to choose a debt consolidation lender who will be able to work with you as you familiarise yourself with the different types of loans available for your disposal. You should choose an organisation that is reputable enough and would be more than willing to explain the features of each type of debt consolidation loan they offer. They should also be able to recommend the best loan that will suit your needs.
Please contact us if you want to learn more about debt consolidation and how you may avail of them. We accept any mortgage-related queries and will be more than willing to explain how each will work for your specific emergencies.