Mounting credit card debt often leads to huge interest payout, and people think of taking a personal loan to pay off the debt. But a dilemma haunts whether a personal loan is better or a zero percent APR credit card is better where a balance transfer facility will ease the debt settlement.
According to personal finance experts, the merit of a debt consolidation loan depends on its capacity to save on interest. A CNBC study quoting Shanté Nicole Harris of Financial Common Cents says transfer with a zero-interest credit card will be a better option if a person can get such a card.
However, card issuers such as American Express, Capital One, and Discover have tightened balance transfer offers in the light of the current economic climate. The credit card sector is still vibrant with names like Bestbuy credit card and Apple card in big demand.
Zero-interest benefit for almost two years
Harris suggests balance transfer credit cards as better because of the zero percent interest on the existing debt for almost 21 months, post-balance transfer. This helps the customer to save substantially on interest payments.
Among no-interest credit cards offering balance transfers, there are Citi Simplicity Card, Wells Fargo Platinum Card, and U.S. Bank Visa Platinum Card.
However, qualifying for balance transfer cards requires a good credit record and symmetry between the balance transfer limit and outstanding debt.
Many banks also charge a balance transfer fee of 3 percent although no-fee products like the Wings Visa Platinum Card also exist. Personal loans offer a lower fixed-rate APR. So it is not a bad idea as the interest rate will be locked in until the loan is paid off in monthly installments.
In personal loans, the terms can range from a few months to three years with longer-term loans attracting higher interest fees.
Among personal loan products, Bank of America’s personal loan and TD Bank personal loan are too popular.
Savings on Interest payout matters
In choosing between personal loans and zero percent APR cards, loans appear more convenient with the potential to save money.
But it will not be a smart move if the interest on a new loan is higher than the current card, adds Harris. A card with a starting zero percent APR will save interest tremendously. Nevertheless, if it takes a longer time to pay off the debt, opting for a lower-interest personal loan will be better.
Currently, most consumer credit cards are charging 16.6 percent APR, per Fed’s data. The average APR for two-year personal loans comes to 9.63 percent. That means for $10,000 worth credit card debt on a card with APR at the rate of 16.61 percent would incur a total of $1,751.15 as interest over two years.
But a personal loan charging 9.63 percent interest annually will have an interest payout of $964.34 only for the same two years. This generates a savings of $786.81 over the credit card option.
However, this is not to say all personal loans are cheap. The data by LightStream shows a range of APR bearing personal loans between 5.95 percent and 19.99 percent also exists depending on the amount, loan duration, and credit history of the applicant.
Ultimately, the deciding factor in the personal loan Vs zero percent APR card conundrum is that the deal must be for a lower interest rate than one has been paying.