Card or loan for debt consolidation?

Credit cardsSainsbury's Finance estimates that personal loans worth £1.5 billion will be taken out in the first three months of this year by consumers keen to consolidate their debts.

However, while M&S Loans is currently offering interest rates of just 6.0%, you can avoid interest charges altogether for almost two years with a 0% credit card. So which is the best option for you?

Credit cards
The main advantage of consolidating your debts on to a balance transfer credit card, is that you can escape further interest charges for close to two years - as long as you have a good credit score and are happy to pay a hefty balance transfer fee.

The HSBC credit card, for example, currently offers HSBC current accounts customers an interest-free period of 23 months, but has a balance transfer fee of 3.3% and a standard rate of 17.9%.

Meanwhile, Barclaycard Platinum also offers a generous 22 months at 0%, but also has a fee of 2.9% and a standard rate of 17.9%.

If you think you can clear your balance within a shorter time, you may therefore be better off with a shorter 0% deal with a lower upfront fee.

Cards of this kind include the Virgin credit card, which offers nine months at 0% with a fee of just 1.5% and a standard rate of 16.8%, and another Barclaycard Platinum card at 16 months interest free with a fee of 1.6% and a standard rate of 18.9%.

Either way, should you fail to clear your balance in full within the interest-free period, you will need to switch to a new deal (and potentially pay another balance transfer fee) to avoid incurring huge interest charges.

By using a credit card to consolidate your debts, you also risk being tempted to reduce your monthly payments to free up some extra cash – meaning that you pay your debts off more slowly – or even to continue spending.

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Personal loans
If you are trying to clear your debts, one of the main benefits of personal loans over credit cards is that they are for a set amount. In other words, you cannot keep on spending as you could with a credit card.

Unlike credit cards, personal loans also have fixed monthly payments, making it easier to budget and ensuring that you make regular inroads into your debt burden.

However, as most of the best deals are reserved for those borrowing at least £7,500, you might find that you need to increase your debt burden to take advantage of a low-rate loan.

You will also pay more interest than you would with the best balance transfer credit cards, even if you borrow through M&S at 6.0% on amounts of between £7,500 and £15,000.

Nevertheless, other loan providers worth considering include Tesco and Sainsbury's, both of which have representative APRs of 6.1% on between £7,500 and £15,000.

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