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Personal Loan or Balance Transfer: Which Is Right for You?
A personal loan or balance transfer may help you conquer your debt.
As of Q1 2024, the average American had more than $7,209 in credit card debt alone.1 If you’re trying to improve your overall financial situation or want to simplify your debt payments, debt consolidation may be for you.
When reviewing debt consolidation options, two common methods are personal loans and balance transfers. Both may simplify your debt repayment while reducing the amount you pay in interest.
Let’s look at the differences between the two and which may be right for your situation.
Key Takeaways
Balance transfers and personal loans may help you consolidate debt and possibly save money with a lower rate.
You may use personal loan proceeds to cover almost any debt or make new purchases if needed.
Balance transfers often offer 0% APR promotional rates, allowing you to pay off the principal balance of a credit card directly. This may help you pay off card debt faster, but these transfers often charge fees, which could reduce your savings.
Balance Transfers and Personal Loans: What’s the Difference?
Balance transfers and personal loans are two financial tools that people use to consolidate debt and streamline debt payments. What you choose depends on what fits best with your finances and which process you prefer.
You also want to evaluate the Annual Percentage Rate or APR for each option to determine which is the lowest cost for your situation. Let’s explore both further.
What Is a Personal Loan?
A personal loan is an unsecured loan that provides a lump sum of proceeds that may be used for almost any purpose, including debt consolidation. The rate and payment are usually fixed for the term, typically from one to five years.
Keep in mind that some lenders may charge origination fees on their loans or prepayment penalties if you pay it off before the end of the loan’s term.
What Is a Balance Transfer?
A balance transfer is an offer that allows you to move the balance from one or more credit cards to another—ideally with a lower rate. The destination credit card could be an existing account or a new account. Since balance transfer offers are often promotional, they may involve opening a new account to take advantage of the deal.
It’s important to note that almost all balance transfer credit cards charge a transfer fee of 3-5% of the transferred balance, which could cost hundreds, or even thousands, of dollars, depending on how much you’re transferring.2
Additionally, the transferred balance counts against your credit limit, meaning you’re reducing the amount you could charge on that card until you pay down the balance. It may also cause you to have a higher credit utilization ratio, which could impact your credit score and eligibility for other types of loans and credit.
Some of these promotions offer a 0% APR on the balance transferred for a specific period. In this situation, paying the full balance before the promotional period ends allows you to avoid paying interest on the transferred amount.
However, if you don’t pay the balance in time, the card’s regular rate usually kicks in, which may be very high. As a reference, credit card rates averaged around 27.91% APR in September 2024.3
Choosing Between a Personal Loan and a Balance Transfer Card
Personal loans and balance transfers are similar tools for debt consolidation. Still, there are some differences that may make one a better choice for your situation.4
Application: As mentioned earlier, a balance transfer could be with a new or existing credit card. If you use an existing credit card, and have the available limit, a balance transfer may be quick because you don’t have to apply for a new account. Suppose you choose to take out a personal loan or apply for a new credit card. In that case, the process may be roughly equal in terms of time to complete. Also, remember that opening any new line of credit, even if it’s due to a promotional balance transfer offer, results in a hard inquiry on your credit report.
Timeline: If you believe you’re able to pay off your debt during a promotional APR period, a balance transfer may be a good fit. However, a personal loan with a longer repayment term may be a better option if you need more time or a lower payment that fits better with your budget.
Rate: If you have a balance transfer option with a 0% APR, this may be tough to beat during the promotional period. But after that term, it typically reverts to the non-promo rate, which is often quite high. On the other hand, personal loan rates tend to be much lower than the variable rate on a credit card. And personal loan rates are usually fixed. Therefore, a personal loan could save you interest in the long term.
Borrowing amount: Your approved limit on a balance transfer or a loan is going to depend on your creditworthiness. Typically, a personal loan allows you to borrow a larger amount than credit cards—personal loans range from $2,000 - $100,000.5
Fees: Both personal loans and balance transfers may charge fees. Some loans and balance transfers are fee free, but typically, a balance transfer would have a fee of 3-5% of the transfer amount. While some personal loans charge origination fees, these fees tend to be less common than balance transfer fees.6
Payments: Personal loans offer a fixed payment monthly, making it easier to add to your budget or debt repayment plan. Using a balance transfer may be more difficult since you have to factor in how long the promotional period lasts and may need to increase your payment once this period ends to meet the minimum payment.
Current repayment plan: If you’re at the beginning of your repayment journey, debt consolidation may be a good choice. However, adjusting your plan may derail you if you’re already on track to
Personal Loan vs Balance Transfer: Which is Better for My Situation?
Looking for a quick review? Here is a summary of the pros and cons of these two methods of debt consolidation loan.7
Consolidation Option | Pros | Cons |
|---|---|---|
Personal Loan | Longer repayment term options Possibly higher loan amounts Fixed rates and predictable monthly payments Flexible use of funds Lower rates than most credit cards | May have fees for prepayment or opening the loan No 0% APR promotional period Requires an application/new account |
Balance Transfer | 0% APR promotional rates May be able to use current account rather than open a new one | Balance transfer fees are common Higher rates after promo period ends Can’t transfer more than your credit limit Only works for credit card debt |
When a Balance Transfer May Be Better
Balance transfers are often best for handling credit card debt that you’re able to pay off fully during the promotional period.
For example, suppose you’ve already budgeted to pay off a credit card in the next 6 months and have the option to move that balance to a 0% APR card, which may save you on interest. Watch for transfer fees though, as they may end up costing you more than your current rate would accrue in interest.
Additionally, since these transfers only offer the lower APR for a limited time, consider whether you’re able to repay the transferred debt within that promotional time frame.
As an aside, some companies may allow your transferred balance to earn rewards in addition to taking advantage of a lower rate.8 Would some extra perks make the balance transfer a front runner for you?
When a Personal Loan May Be Better
Using a personal loan to consolidate debt may be a better choice when you’re dealing with high balances or a need to consolidate different types of debt.
For example, if you want to pay off a couple credit cards and outstanding medical bills, a personal loan may be a better option because the proceeds go into your bank account, and you decide from there what to pay off.
Additionally, personal loans offer the benefit of fixed, and often lower, rates than credit cards, meaning your interest charges won’t suddenly increase like they would on a card with a balance transfer offer. They also tend to have fewer fees and offer steady payments amounts since loan rates are typically fixed instead of variable, which is the case with most balance transfer cards.
A personal loan also offers flexibility, allowing you to use the proceeds to pay for other expenses if an urgent situation arises and you don’t have emergency funds.
You May See a Temporary Change in Your Credit Score with Both Options
Keep in mind that both balance transfers and personal loans may cause a temporary drop in your credit score. This is because you’re taking on a new line of credit or a new type of debt, which could increase your debt-to-income ratio .
Furthermore, lenders and credit card issuers like to know your credit score before they issue you a new loan or line of credit. Your application triggers a hard credit inquiry, which may cause your score to drop temporarily.
As you pay off your balance and make those payments on time and in full, your score should bounce back.
Final Thoughts
Balance transfers and personal loans may help you pay off your debts at lower rates than you’re currently paying. Balance transfers are often considered for consolidating credit card debt, while personal loan proceeds may be used for just about any type of debt you have.
Getting your debt under control is just one step in your financial wellness journey to help set yourself up for future success.