Which is better for paying off debt – a balance transfer or a personal loan?
Fortune is not always in your favour, no matter how hard you plan. Sometimes, you find yourself facing a growing credit card balance or a need for a quick infusion of funds. To remedy this, there are two common options you can use – a balance transfer or a personal instalment loan. But which is the better choice for you?
Let’s do a quick breakdown.
A balance transfer allows you to transfer either the outstanding balance on your credit card to another credit card or a percentage of your available credit card limit to your deposit account. You get a 0% p.a. interest rate for the balance transferred, for a promotional period which generally lasts from 6 to 12 months. After this period, interest rates revert to normal credit card rates. Keep in mind that a one-time processing fee commonly applies.
A personal loan is, as the name implies, a simple loan given out for personal use. It is usually unsecured, so you don’t have to post any collateral, with a typical tenure of one to five years.
It’s worth keeping in mind that balance transfers generally have a lower Effective Interest Rate (EIR) than personal loans.
Why Should You Consider a Balance Transfer or Personal Loan?
Both balance transfers and personal loans can help you with two things:
1. Consolidating Your Debt
Debt consolidation is a way of dealing with high-interest debt, such as credit card debt. A balance transfer gives you the opportunity to pay 0% interest on your outstanding debt over the promotional period.
A personal loan, which has much lower interest rates compared to credit cards, can also be taken out for the purpose of paying off said credit card debt. It gives you the chance to pay off that debt on a fixed schedule over a longer period at a lower interest rate.
2. Giving You Quick Access to Funds
It’s obvious that personal loans can give you quick access to funds, but how can balance transfers do that? Balance transfers are not limited to credit card balances– they can be applied to available credit limits as well. So, if you have an available credit card limit of S$8,000, you can transfer most of that as cash into your deposit account.
Main Questions to Ask Yourself When Choosing Between Balance Transfers and Personal Loans
Both balance transfers and personal loans can be the solution to your personal financial situation. But how would you know? Ask yourself these two questions.
1. How Fast Can I Repay My Loan or Balance?
The entire purpose of a balance transfer is to take advantage of that promotional 0% interest period. If you can’t pay down most or all of the transferred balance within that time, you’ll find yourself paying credit card rates. And with effective interest rates on credit cards in Singapore standing at about 25% p.a., saving on interest rates makes a huge difference. This is about double or triple the rate on a typical personal loan!
Read more about how Singaporeans can save over $500 million a year on credit card interest.
Therefore, if you know you can pay off most or all your transferred balance within 6 to 12 months, then a balance transfer is the best choice for you. But if you know you can’t, then it may be wiser to choose a personal loan.
2. How Much Funds Do I Need / How Much Debt Do I Have?
If you need a larger amount of funds or want to consolidate a bigger amount of debt, a personal loan may be the better option. A personal loan offers not only lower interest rates but a longer loan tenure, which can take the load off your monthly repayments. Furthermore, the larger the debt amount, the harder it is to pay it off within the promotional period of a balance transfer. The last thing you want to do is to have a larger sum of borrowed money incurring credit card interest rates.
Will either of these products affect my credit score?
If you are unable to pay off the sum within the promotional period, the amount will quickly escalate because of credit card interest rates. This will have a negative effect on your credit score as the amount of money you owe will lower your credit score.
However, if you consolidate multiple types of debt using a single personal loan, you can improve your credit score. The number of open credit accounts you have is a factor, so if you can replace multiple open accounts with just one, this will actually have a positive effect on your credit score.
It is important that you keep the effect on your credit score in mind when managing your finances. The lower your credit score, the less banks are willing to lend you, which makes it considerably harder to successfully manage your financial life.
Once you’ve decided whether a balance transfer or personal loan is right for you, you would still need to choose a specific to apply for. Doing all that research can be a headache.
Fortunately, SingSaver has done most of the work for you by compiling the best balance transfer and personal loan options into a handy comparison page each. Alternatively, check out our reviews of the Best Personal Loans in Singapore 2019 for a breakdown of the best financial products for different needs.
Read these next:
Best Short-Term Personal Loans In Singapore
What’s the Average Personal Loan Interest Rate in Singapore?
4 Times In Your Life You Should Consider Getting A Personal Loan
Unpaid Credit Card Bills? Here’s How A Balance Transfer Can Help
6 Myths About Personal Loans Busted
By Ian Lee
Ian is a former investment banker turned freelance finance writer. He specialises in creating versatile finance content for the attention economy, ranging from personal finance and investing to fintech and cryptocurrencies.