If you suspect your personal debt level is in danger of becoming obese very soon, now is the time to take action. With so many living costs going up, household debt levels have never been under more pressure to reduce. How you approach consolidating your debts depends entirely on your willpower.

Personal loans have traditionally been used for debt consolidation purposes but these are now being challenged by credit cards in a bid for more market share. As a lure some credit cards are offering attractive balance transfer deals. To work out which method is best for you, you need to know more about both.

PERSONAL LOANS

Debt consolidation has now become the 2nd most popular reason for taking out a personal loan after car purchases. Over 85% of personal loans offered by financial institutions in Australia allow you to borrow for debt consolidating purposes.

Personal loans generally allow you to borrow a fixed amount of money and usually require you to repay your loan in fixed installments over a set period of time. With fixed terms somewhere between 3 to 5 years, consumers are forced to pay within the stipulated period. Hence this may be advantageous to consumers who lack the discipline in repaying their debts on time, especially with a credit card where only repaying the minimum repayments may take you up to 30 years to repay all your debt!

CREDIT CARD BALANCE TRANSFERS

Credit card balance transfers involve rolling your debts onto a low or no-interest credit card. So, for example, you may roll three credit cards that are charging you a high interest into the low or no-interest credit card. However, the tricky part here is that the low or no-interest rate period normally lasts for only the first 6 months or the first 12 months. After the introductory period is over, the interest charged normally reverts back to very high interest rates. If you are considering taking out this `option`, you must ensure that you remain disciplined in repaying all or most of your debts before the balance transfer period ends.

* includes 0% 6-month balance transfer rate; assumes minimum repayment of $20 or 2.0% Calculations based on $10,000 over 3 years; all application and annual fees are excluded

The table above examines the difference between repaying a loan amounting to $10,000 over 3 years using either a 13.50% personal loan versus a 12.99% credit card with balance transfer period of 6 months at an introductory rate of 0%. By looking at the total interest paid, the consumer would be better off by an estimated $300 taking out the credit card instead of the personal loan. However, if the consumer fails to repay the fixed monthly amounts of $327 a month on the credit card, he may find himself having to repay up to $2,525 worth of interest. Worse still, by paying only the minimum of $20 or 3% on his credit card, he will take more than 16 years to repay his loan.

Apart from cost considerations alone, consumers should strongly consider their own spending habits and their ability to repay their debts on time. If you are prone to overspending or not paying your debts on time, you are better off with a personal loan, as it forces you to make regular payments. The borrowing period is another important consideration because if it takes you a long time to repay your debts, you might end up paying a much higher interest rate on your credit card than a personal loan. This is because after tm repayment of $20 or 2.0% Calculations based on $10,000 over 3 years; all application and annual fees are excluded

The table above examines the difference between repaying a loan amounting to $10,000 over 3 years using either a 13.50% personal loan versus a 12.99% credit card with balance transfer period of 6 months at an introductory rate of 0%. By looking at the total interest paid, the consumer would be better off by an estimated $300 taking out the credit card instead of the personal loan. However, if the consumer fails to repay the fixed monthly amounts of $327 a month on the credit card, he may find himself having to repay up to $2,525 worth of interest. Worse still, by paying only the minimum of $20 or 3% on his credit card, he will take more than 16 years to repay his loan.

Apart from cost considerations alone, consumers should strongly consider their own spending habits and their ability to repay their debts on time. If you are prone to overspending or not paying your debts on time, you are better off with a personal loan, as it forces you to make regular payments. The borrowing period is another important consideration because if it takes you a long time to repay your debts, you might end up paying a much higher interest rate on your credit card than a personal loan. This is because after the interest free period ends, credit cards normally revert back to charging very high interest rates.

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