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Dealing with card debt – 0% Cards or Loans

What’s better, a loan or a credit card? There are thousands of financial products offering credit on the market, but how do you choose between them?

We take a closer look at low-interest loans and 0% balance transfer cards to find what the best way to clear credit card debt.

Let’s do the math

So for instance, if you’re looking to transfer £3,000 to a loan charging you a flat 5% interest rate over a 3 year (36 month) term, you will pay roughly £237 in interest.

Compare that to a 0% balance transfer card offering you 24 months 0% on your balance. Say you transfer across £3,000 of debt, you first pay a fee. Let’s say that’s 3%, so you’d be paying £90 to transfer.

Then let’s say you pay off £2,000 over the next two years, leaving you with £1,000 of balance. Your rate will then revert to something more typical, like 19.99% say. If you then paid off the remainder over the next 12 months you would have paid around £111 in interest.

Finally, add the original fee and you have a total charge of £201 to clear your £3,000 debt over 36 months. So in this example, using a 24 month balance transfer deal would be £36 cheaper, even after the rate reverted and including the upfront balance transfer fee.

Of course all the different combinations change things. If you could pay your debt off even sooner, say within the 24 months offered in our example as a 0% balance transfer period, then the card would be far cheaper.

Conversely, if you got behind on your payments, could only cover a smaller amount each month, and had a greater balance than £1,000 after the first 24 months, then the odds are that a loan would be cheaper.

We’ve developed a special calculator to help you work out that total cost of your loan with different amounts and over different periods. You can find it on our loans calculator page.

Clearing credit card debt

Why a 0& balance transfer credit card may be better

A balance transfer card is designed to take your existing debt and move it to a 0% period. Don’t be fooled – you will still pay a balance transfer fee of typically between 2% and 3%, but if that’s less than you’re currently paying in interest your should definitely consider it.

One of the main reasons people are attracted to 0& balance transfer credit cards is the flexibility they offer when it comes to spreading the repayments.

Whilst a loan requires to pay a fixed amount per month throughout its duration – with severe penalties if you fall behind – a credit card gives you the flexibility to increase and decrease your repayments.

The only condition is that you maintain your minimum repayments, although it’s also worth noting that if you don’t clear the balance on a 0% balance transfer card by the end of the balance transfer period you’ll pay a huge interest rate.

Furthermore, if you miss any minimum repayments you could end up losing your 0% balance transfer deal altogether.

However the main attraction of a balance transfer card is that it allows you to pay off your debt in peace, so you should always aim to pay more than the minimum repayments anyway.

Finally, remember that the ‘card’ bit of your balance transfer credit card isn’t important – clearing the debt is. The last thing you should be doing is spending on a 0% balance transfer card.

Take a look at all the latest cards on our 0% balance transfer credit card table.

Why a loan may be better

The single biggest advantage loans have over credit cards is the rate. The interest rates on loans tends to be significantly lower than credit cards, plain and simple.

However, if you’re borrowing smaller amounts and for shorter periods, the interest rate charged will go up. While this rate is still likely to be lower than the headline APR rate offered by your credit card, the 0% balance transfer cards we’ve looked at change this equation.

Take a look at all the personal loans on our personal loans table. You can use the sliders at the top of the page to compare the cost of different loan amounts and periods.

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