If you’re struggling to pay off your debt, you can always consider using a balance transfer or a personal loan. But what is the difference between these two? Which one is the right one for you? Read this article to find out!
We all make difficult and/or wrong financial decisions in life, and sometimes this can lead us to a debt-riddled path. As such, there may come a time when you find yourself grappling with debt.
From 2014 to 2018, stats from the Malaysian Department of Insolvency revealed that 95,000 people were declared bankrupt between 2014 and 2018 because they couldn’t honour their borrowings with lenders. Some of the main causes that dragged them down were personal loans (27.76%), car loans (24.73%), housing loans (14.09%), and credit card debt (9.91%).
So… what if you’re part of the statistic? To remedy this, there are two common options that you can consider - a balance transfer or a personal loan.
But which is right for you? How are they different from each other? And why would you even consider applying for a loan if you’re already in debt? Let’s start by first distinguishing the differences between balance transfers and personal loans.
What is balance transfer? What is a personal loan?
A balance transfer essentially lets you transfer the outstanding owing on your credit card(s) to a new credit card. This method is only meant to tackle credit card debt. Here’s how it works.
Let’s say you have 2 credit cards and your total debt has snowballed to RM20,000. Because you cannot afford to pay your balance in full, it grows month after month with a compounding interest rate of 15% p.a.
By getting a balance transfer credit card, you basically transfer your existing RM20,000 debt to a new credit card and avoid paying the already hefty interest rate. What you’ll pay instead, is a 0% interest 12-month instalment payment of RM1,667 to your new bank. After 12 months, your RM20,000 debt will be fully paid off.
Balance transfers typically come with a 3, 6, 9, or 12-month repayment term. If you miss your monthly repayment, you will be charged a hefty interest fee.
View all balance transfer credit cards here.
On the other hand, a personal loan is simply a loan given out for personal use. Unlike a balance transfer, you can use this money for anything you want. Personal loans have a much lower interest fee compared to the 15% p.a. credit card interest rate, and can be extended for many years so you can take your time to slowly pay it off.
A variation of a personal loan is a debt consolidation loan. Similar to a balance transfer, the sole purpose of this loan is to consolidate all your existing debt (regardless of what type of debt). Your repayment will be to the credit facility by the month.
Between balance transfers and personal loans, which one should you choose?
You can start by asking yourself these three questions:
1. How fast can you repay your loan or balance?
If you are confident that you can clear it within a short time frame (e.g. 3, 6, 9, or 12 months), then you might as well choose a balance transfer. There are balance transfer cards with a one-time fee of as low as 3%, sometimes even 0%. This is something that you definitely want to take advantage of, but it requires a lot of discipline in your repayment.
If you don’t think you can commit to that, then a personal loan would be more ideal as you will be able to stretch out your repayment for years.
2. How much debt do you have?
If you need a large sum of money, you may want to consider a personal loan. As mentioned in our previous point, it has a longer return period - this makes it easier on your wallet to repay your owing.
3. What are you using this for?
If you have other types of debt to clear - for example, missed rental payments or if you owe someone money - then you will not be able to utilise a balance transfer. Balance transfers are only meant to repay credit card debt, whereas personal loans give you the flexibility to do whatever you want with the money.
None of the above matters if you don’t repay your monthly dues in full
Regardless which one you choose to help you clear your debt, you have to be prepared to make your monthly payments within the time frame stated in your terms. If you fail to do so, the repercussions can be pretty severe.
It’s also important to remember that while these plans give you some breathing space and a way out from debt, it’s important that you make wiser and better financial decisions in the future so as not to fall back into debt and start the vicious cycle again.