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Debt Management for Startups – Consolidation Loan vs. Balance Transfer

Mandy Bular796 09-Apr-2018

Among the biggest concerns of entrepreneurs is getting sufficient funds. Institutional finance is often very difficult to get forcing them to use credit cards and personal loans. Many entrepreneurs fail to manage their debt properly and end up getting into a debt trap. To get out of this situation, two methods are often recommended; credit card balance transfer and consolidation loans. Take a quick look at both.

Credit Card Balance Transfers

A balance transfer allows you to sweep all existing credit card dues to a cardwith a facility offered by the card issuer. The best scenario is getting a zero percent balance transfer wherein your dues do not attract any interest for a specified number of months. You will need to find a card that offers you the longest possible interest-free or low-interest period because after the promotion ends, you will be charged the typically-high credit card rates of interest. You should aim to pay off your entire dues before the period ends.

What Do You Need To Look Out For In Balance Transfers

You need to make certain that your savings on the interest are more than the processing fee. If it is a new credit card, an annual fee may be charged. Even though the zero-percent interest rate may be advertised loudly, make sure that you are eligible because the actual rate charged will depend on your credit score. The interest-free period may also be very limited so make it a point to know the details before you sign up.

Debt Consolidation

You can also use a debt consolidation loan to pay off all your individual debts and focus on paying off one loan. Consolidation also allows you to restructure your debt for better affordability. The interest rates are much lower than that charged by cards and you can also extend the repayment period to bring the monthly EMIs down. Consolidation loans are handy when the interest-free period of balance transfers is too short for you to repay your debt. There are typically no processing or application fees for debt consolidation loans; the rate of interest that is fixed for the tenor is all-inclusive.

While debt consolidation loans carry lesser interest rate than cards, you will need to shop around to get the best rates. The interest rate will depend on a number of factors like your credit score, the tenor, the availability of collateral, etc. While the fixed rate of interest may be higher than variable rates, you can plan your finances better with fixed rates as the EMI will be constant throughout the loan tenor.

Conclusion

Whether you opt for a credit card balance transfer or a debt consolidation loan is dependent on your repayment capacity, your credit score, the rate of interest and of course, the market opportunities. Balance transfers work very well if you are confident of paying off the dues within the typically short interest-free period, while consolidation loans may work better for really heavy debts that will take a number of years to repay.



Updated 09-Apr-2018

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