If you’re looking to save money on interest payments, you’re not alone.
It’s a common aspiration, since average UK household debt has reached a record level of £15,400. Many individuals may therefore be seeking to minimise the interest that they pay ahead of expected increases in interest rates following a decade of record lows.
This could mean that now is a good time for people to consider reducing debt in order to improve their long-term financial situation. Balance transfer credit cards and personal loans are two means of cutting interest charges in order to potentially repay debt faster.
Is one better than the other? That depends, because their individual appeal usually comes down to personal circumstances.
The appeal of a balance transfer
One means of potentially reducing the interest paid on existing debt is a balance transfer card. Existing credit card debt is transferred to a new card that charges 0% interest for a specified period. The 0% interest period could be as long as 32 months and could make a significant difference to the amount of interest paid.
For example, an individual with a £3,000 credit card debt and who repays £150 per month at an APR of 18.9% may be able to save £570 in interest. The 0% interest period may also enable this person to repay their debt four months faster – assuming they maintain their £150 per month repayment.
A balance transfer card may include a fee for transferring a balance. This fee is likely to be less than the amount of interest that would otherwise have been paid by an individual during the 0% interest period, although double-checking this before undertaking a balance transfer is crucial.
An alternative: a personal loan
A personal loan could be a sound means of reducing the interest paid on debt, and may allow an individual to repay their outstanding balance faster. Personal loans often have a rate of interest that is significantly lower than that charged by credit cards; the specific rate charged depends on personal circumstances.
Individuals may also be able to overpay their personal loan without incurring penalties, which could provide them with greater flexibility over how quickly they can reduce their overall debt level.
Unlike with balance transfer cards, there is usually no fee for taking out a personal loan. However, a personal loan has a set timescale for repayment, unlike a credit card which can be indefinite. This could mean that an individual is under greater pressure to repay their debt within a specific time period, albeit at a lower overall cost.
Which is “right”?
Whether a personal loan or a balance transfer card is more appealing for an individual with existing debt depends on their financial situation. If they are confident in being able to clear their debt within the 0% balance transfer period, it may make sense to opt for a balance transfer card.
However, for individuals who think they may need more time than that offered by the 0% interest period on a balance transfer card to repay the outstanding amount, a personal loan may be better. It may be more prudent to pay a set rate of interest on a personal loan over a longer time period, rather than pay 0% interest on a balance transfer card for a shorter period of time, only to return to a high rate of interest once the balance transfer period is over.
While both strategies could help to reduce interest payments and cut debt at a faster pace than if it remained on an existing credit card, their relative appeal depends on an individual’s personal circumstances.
