Loans

Balance transfer vs personal loan

By Matt Mayerle

Reviewed by Nooreen B

Edited by Izzy M

Modified on January 29, 2024

Sometimes, debt gets to a point where it is too much to handle as it is. If you have been wracking up debt for quite some time now, it might be intimidating to figure out how best to pay it off.

Nowadays, it seems like everyone and their mother claims to know the only correct method to pay down debt. Some people swear by the snowball method, others by the avalanche method. While a host of others swear by the simplification of debt consolidation.

If you are considering consolidation, you might be unsure whether a personal loan or a balance transfer credit card is a better option. As with most things in personal finance, the right choice depends on your particular financial situation and priorities.

Too Much Credit Card Debt?

How do you know if your debt has become too much? How can you tell that it’s time to begin moving towards becoming debt-free?

An over-reliance on credit cards is incredibly common in this day and age. Many more people have problem debt without realizing it. It is absolutely crucial that you can take action to get rid of your debt once you acknowledge that it has become an issue. Though it can be challenging to recognize the signs, there are plenty of red flags that can point to the debt being out of control.

Signs Your Debt Is Out of Control

Here are a few indications that your debt may be a problem:

The minimum payment on your credit cards has become difficult to afford, and it’s the most you usually end up paying.
You are near the credit limit on all your outstanding credit cards.
The interest rates are high enough to make the minimum payment you make on each card useless against your interest charges.
Your current debt-to-income ratio is far too high.
The credit utilization ratio you have is well over the recommended 30%.

Why Choose Debt Consolidation?

There are circumstances where debt consolidation isn’t necessary for successful debt repayment. However, there are situations where debt consolidation is the most cost-efficient option. Debt consolidation loans and balance transfer credit cards will simplify your repayment schedule to one fixed monthly payment, which could make the process of paying off one’s debt significantly easier.

Depending on what your interest rates look like on your current credit card debt, the balance transfer fees or origination fees on debt consolidation loans could cost you less in the long run. Debt consolidation through balance transfers or personal loans can be a particularly good option for individuals with the cash flow to pay off the debt quickly. You could save money on interest if you have the capability to pay off the debt in a few years.

Overview: Balance Transfer vs. Personal Loan

Balance Transfer vs. Personal Loan	Balance Transfer Credit Card	Personal Loan
Debt Size	Smaller debts can be paid off in a year or two.	Larger debts may take several years to pay off.
Qualifications	A good or excellent credit score.	Usually, a good credit score but bad credit personal loans are available.
Payment Plan	Pay off the debt by the time the introductory period ends so you don’t get charged interest.	Varied term lengths with fixed monthly payments made until the loan is finished.
Costs	Some balance transfer credit cards charge a one-time fee.	Personal loans will have a fixed interest rate, but some also have an origination fee.

How Balance Transfer Credit Cards Work

A balance transfer credit card is a special type of credit card that allows you to consolidate your existing credit card debt into one single balance. Balance transfer credit cards are one of the popular methods to consolidate debt because many balance transfer offers include a promotional period of 0% APR.

The promotional period with balance transfer offers allows borrowers to pay off their credit card debt with a 0% interest rate, saving them an exponential amount of money. The catch is that you need to pay off the existing debt before the balance transfer offer ends; otherwise, you will begin to pay interest again. Most promotional period balance transfer offers last between 12 and 20 months.

If you do not have the cash flow to completely pay off the existing credit card balance before the promotional period ends, a balance transfer credit card may not be the best option for you. The interest rates on balance transfer cards tend to be even higher than they are for typical credit card debt if you have a remaining balance on the card when the introductory offer ends.

A balance transfer credit card is straightforward in how it works. Once you apply and are approved for the balance transfer card, you can transfer debt from your credit cards that charge interest onto the 0% APR balance transfer card. After that, you begin paying off the entire debt as quickly as possible before the interest rates kick in.

Benefits of a Balance Transfer Credit Card

Probably the most significant benefit of a balance transfer offers is the ability to pay off your credit card debt with absolutely no interest for a set period of time. This is not possible with personal loans or other credit cards that you’ve had open for some time.

Since there is no interest rate, every single monthly payment you make will go directly towards your principal balance, which could make repayment faster than it would on high-interest debt.

Additionally, some balance transfer cards offer perks like financial protection or rewards. Balance transfer cards make it easy to transfer money from your other credit cards, so it’s effortless to consolidate debts and pay them off quickly without a prepayment penalty.

Drawbacks of a Balance Transfer Credit Card

While most balance transfer credit cards don’t charge an annual fee, many charge some kind of balance transfer fees. Balance transfer fee could add up to three to five percent to your balance. If you can pay off the entire debt before the introductory period ends, those fees could be worth the money you save.

However, the promotional offer won’t last forever, and you could be stuck paying a significant interest rate if you haven’t paid the balance in full. You must be careful not to keep using your balance transfer card for purchases because you might never get out of debt.

How Personal Loans for Debt Consolidation Work

A debt consolidation loan is basically an unsecured personal loan used for the purpose of paying off your debts. Unlike credit cards with introductory APRs, personal loans have fixed rates you pay in interest from the get-go. With a personal loan for consolidation, you will also have fixed payments and set loan terms so that nothing will catch you off guard.

After being approved for a debt consolidation personal loan, you will receive the loan amount and use the funds to pay off your debts. Like any other installment loan, you will have monthly payments that you must make on-time until the total debt consolidation loan amount is paid off.

The interest rate for personal loans can vary considerably depending on your credit report. The fixed interest rate on a personal loan can be anywhere between 6% and 36% APR. Still, you can usually find an interest rate considerably lower than what you are currently paying on your credit cards. With consolidation personal loans, you don’t need to be concerned about keeping track of multiple minimum payments on all your cards. Instead, you can focus on making timely payments once a month until the personal loan is paid off.

Benefits of a Debt Consolidation Loan

Debt consolidation personal loans are excellent options for borrowers with a significant amount of debt to pay off. A personal loan allows you a longer repayment schedule with a reasonable fixed interest rate and consistent minimum payments each month.

Personal loans can give you multiple years to pay off your debt with a consistent rate which you don’t have with a balance transfer. Lenders tend to prefer a good credit rating, but it isn’t as much of a hard line of a requirement as it is with balance transfer credit cards as there are personal loans for bad credit. However, those will have much higher interest rates to compensate for the risk of subprime credit.

In most cases, you will be able to pay off your loan earlier than scheduled if you want to save some money on interest. Be sure to ask the lender if there is any kind of prepayment penalty for repaying the loan ahead of time.

Drawbacks of a Debt Consolidation Loan

Some personal loans charge an origination fee which can be costly depending on the lender and your financial situation. You can compare the origination fee to the cost of the balance transfer fee beforehand if you are still undecided.

With a debt consolidation personal loan, you won’t benefit from the introductory 0% APR as you will have to pay interest from the start of the loan. However, this might be necessary if it is impossible to pay off your balances before the promo interest rate ends.

When considering a personal loan, it’s important to do your research. Do some rate shopping and read up on lender reviews to ensure you pick the right personal loan and lender.