As the dust settles on Christmas spending and the real amount of money owed becomes agonisingly apparent to many consumers, the repayment juggling act begins and debt repayment battle plans have to be drawn up.
Once the hallowed domain of the personal loan, debt consolidation is being increasingly targeted by credit cards with mixed results for consumers.
RateCity.com.au points out the pros and cons as credit cards go head-to-head with personal loans in the battle for the debt consolidation market. After car purchases, debt consolidation is the second most popular reason for taking out a personal loan. However credit cards are challenging this with very appealing zero percent balance transfer offers.
In your interest
With the average interest rates on unsecured personal loans standing at 13.28%, compared to credit cards at an average of 15.99%, it makes sense to consolidate debts through a personal loan.
Credit cards, however, are dangling a carrot to consumers. This comes in the form of convenience plus an introductory offer of zero or low percent interest rate for a set time on any balance transfer.
The idea is that you bundle up all your credit card debts into one fat amount and put it on a new credit card, usually with a new financial institution. You then pay zero or a low interest rate for the introductory period, say, the first six months. This period gives you a break from added interest and lets you concentrate solely on paying off the debt.
That's the carrot, where's the stick?
This battle plan against marauding debt sounds bombproof but who can resist the charms of a shiny new plastic card subconsciously burning the words ‘Use me’ into the brain every time the wallet is opened?
Expect to feel the sting if you stray from the defined path and use the card before paying off the original debt, thus incurring a much higher interest rate. Repaying late or not repaying as much as possible during the introductory period will see you losing ground in the battle.
Worse still, if you opt for any reason to pay only the minimum on the credit card debt, you’re likely to go down in debt history as losing the war. Not only will you be saddled with extra interest, you'll also add decades to the life of the debt.
Wave the white flag or march to victory?
Determining whether consolidating your debt through a personal loan or a credit card is a personal decision. Being honest with yourself first up is the key to success. Are you strong enough to take the credit card route and stick rigidly to your repayment plan?
If you are, you will benefit from a zero or low percentage balance transfer offer and repay your debt for less. If you suspect you will succumb to retail temptation during the period it will take you to repay the debt, a personal loan is for you. The discipline of repaying a set amount per month will pay off in the long run as your debt whittles down to zero.
There's an added bonus to using a personal loan, too. It's likely you will settle into the groove of regularly putting some of your income into the personal loan so when the loan is finally paid off, why not continue to bank that same amount, this time in a savings account.
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