Personal Loan or Balance Transfer: Which Is Right for You?
A personal loan or balance transfer may help you conquer your debt.
As of Q2 2023, the average American had more than $6,568 in credit card debt alone.¹ If you’re trying to improve your overall financial situation or want to simplify your recurring 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 potentially lowering your rate.
Let’s take a look at the differences between the two and which may be right for your situation.
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 directly, which may help you pay debt off faster, but often charge transfer fees which could make payoff more difficult.
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 which 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, which typically ranges 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 brand-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 transfers charge a fee of 3-5% of the transferred balance, which could cost hundreds, or even thousands, of dollars.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.
Some of these promotions offer a 0% APR on the balance transferred for a specific time 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 20.70% APR in October 2023.³
Choosing Between a Personal Loan and Balance Transfer
Personal loans and balance transfers are similar tools for debt consolidation, but there are some differences between the two that may make one a better choice for your situation.⁴
Application. As mentioned earlier, a balance transfer can be with a new credit card or an existing one. If you use an existing credit card, and have the available limit, a balance transfer may be fairly quick to complete because you don’t have to apply for a new account. If you’re choosing between taking out a personal loan or applying for a new credit card, 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. But if you need more time, a personal loan with a longer repayment term may be a better option.
Rate. If you have a balance transfer option with a 0% APR, that may be tough to beat during the promotional period. But after that term, it reverts to the non-promo rate, which is often quite high. Personal loan rates, on the other hand, tend to be much lower than the variable rate on a credit card. Since they are lower, they may save you thousands in interest over 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, if you’re already on track to pay off your debt using the snowball or avalanche method, adjusting your plan may knock you off track.
Personal Loan or Balance Transfer: Which is Better for My Situation?
Looking for a quick review? Here a summary of the pros and cons of these two methods of debt consolidation loan.⁷
Longer repayment term options
May allow consolidation of larger debts
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
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
When a Balance Transfer May Be Better
Balance transfers are often best for handling credit card debt that you’re able to fully pay off during the promotional period. For example, if you’ve already budgeted for paying off a credit card in the next 6 months and have the option to move that balance to a 0% APR card, you may save some money on interest. Watch for transfer fees though, as they may end up costing you more than your current rate would accrue in interest.
However, 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.
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 on hand.
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.