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Balance transfer vs. personal loan

personal loan vs balance transfer

A balance transfer can be the action of transferring debt, but it usually refers to a credit card or balance transfer loan option that allows you to pay off multiple debts. On the other hand, a personal loan is a type of installment loan which can be used for all kinds of expenses including debt payoff. 

In 2022, American households averaged $101,915 in debt.1 And for many people, getting out of debt or reducing it is a big financial goal. Personal loans and balance transfer cards are both beneficial financial products that many people use for reducing debt. Knowing the difference between these two products is going to be extremely helpful, especially if you are trying to decide what the best option is for you. Continue reading to learn more about a personal loan vs. a balance transfer. 

The Main Differences Between a Personal Loan vs. Balance Transfer

Personal loans are installment loans, repaid in steady payments. You can borrow these loans for almost any reason. Some common causes include paying an unexpected expense or taking care of monthly bills. 

Once you get a personal loan, you’ll get the funds in a lump sum right away. While repaying, if you find that you need additional money, you’ll need to apply for another loan option. 

While balance transfers are usually credit card options that allow you to transfer your existing credit card debt/ balances onto that card, balance transfer credit cards will be revolving credit accounts—which means you can use them multiple times until you reach your credit limit. And if you make payments to your card after hitting that credit limit, you will get access to more available credit. 

Although you can use a balance transfer credit card for purchases, it isn’t a good idea. A personal loan, though, is made to be used for almost any purchase or expense, including consolidating credit card debt. And so, a personal loan offers more versatility with its use than a balance transfer credit card may provide. 

Everything You Need To Know About Personal Loans 

Need to know about a personal loan to determine whether it is the right option for you? Below you will find everything you need to know about these loans.

Where To Find Personal Loans?

You can find personal loans with several different lenders; here are some places to get started: 

  • Banks and Credit Unions — Banks and credit unions are usually one of the primary places people start when looking for funding, simply because they likely already have a checking or savings account and may be aware of their products and services. Although these institutions may offer competitive rates on their personal loans, they are hard to qualify for if you have bad credit or a lower income.   
  • Online Lenders — Online lenders are the most flexible lenders you can find for personal loans or any other loan product out there. If you have bad credit, a personal loan online will be your best bet for getting funding. Don’t forget to do some research on the lender before choosing one to apply with, as there are many personal loan scams online. 

What Do You Need for a Personal Loan?

If you are ready to apply for a personal loan, you’ll need to have some documentation with you. Here is what lenders will ask about: 

Documentation Required for a Personal LoanDescription
1. Government Issued Photo IDYou need a government-issued photo ID such as a driver’s license, passport, or military ID to prove your identity.
2. Proof of IncomeDocuments like bank statements, paystubs, letters of income, etc., are used to provide proof of income. Eligibility doesn’t always require a full-time job, as long as you have an accepted source of income.
3. Documents Proving ResidencyProof of residency is required and can be established with documents like pieces of mail, bank statements, or a lease or mortgage agreement.
4. Social Security Number or TINLenders will ask for your social security number or tax identification number (TIN) when you fill out a loan application.
5. References (Sometimes)In some cases, lenders may request references as part of the loan application process.

Repayment for a Personal Loan

Generally, personal loan repayment is made in equal regular installments. Once you get the funds from a personal loan, repayment usually begins 30 days after that funding date. Your monthly minimum payment will depend on the loan amount you borrowed, the interest rate, and how long or short your loan is. 

To calculate your monthly payment amount, you can use a personal loan calculator or do the math yourself; you’ll need information on the loan amount, interest rate, and how long the loan is. 

Is It Possible To Get a Personal Loan With Bad Credit?

Yes, you may be able to get a personal loan even if you have bad credit! There are many online lenders that offer personal loans for borrowers with a low credit score or borrowers who are still building their credit score and history. Keep in mind that bad credit loans will often have higher interest rates and lower loan amounts. But they can still be helpful if you need some extra cash. With on-time repayments on your personal loan, you can boost your credit score and be eligible for better personal loans in the future. 

What Is a Balance Transfer?

A balance transfer is the action of transferring multiple debts into one credit account. The goal of a balance transfer is to get a more manageable monthly payment and lower interest rates. For many, this allows them to pay off debt and still save money. In most cases, balance transfers refer to credit card debt, so you will be looking at a balance transfer credit card. 

When combining multiple loans, you’ll hear that action referred to as debt consolidation, and to do that, you will need to use a debt consolidation loan. Debt consolidation loans serve the same purpose as balance transfer credit cards.  

Where To Find a Balance Transfer Credit Card?

You can find a balance transfer credit card with online lenders or look at banks and credit unions. Like personal loans, you’ll find more flexibility with online lenders vs. financial institutions like banks. Before choosing a credit card, make sure you understand the credit card’s’ interest rates/APR, credit maximum, fees, and repayment terms. You’ll want to find a card that covers all the credit card debt you are trying to get rid of while also being affordable and manageable with monthly payments. 

What Do You Need for a Balance Transfer Credit Card? 

When applying for a balance transfer credit card, the requirements are similar to a personal loan; you’ll need to provide a government-issued photo ID, proof of income, proof of residency, and a social security number or TIN. 

What Will Repayment Will Look Like With a Balance Transfer Credit Card 

Once you get approved for a balance transfer card, you can use it immediately. You can simply contact your lender and tell them what debts you want to be transferred over—balance transfers take an average of a week. Once this process is complete, your repayment should begin next month (talk to your lender for specifics). With balance transfer credit cards, you will have a single payment to make, even though, technically, all your other debts are included in that card. 

This is actually one of the perks that come with these cards; instead of juggling multiple credit cards, you only have to worry about one! Your balance, APR, and repayment terms will determine your monthly payment amount. Remember that if you use your card after you transfer debt, you won’t have fixed monthly payments while repaying the credit card. 

Can You Get a Balance Transfer Credit Card With Bad Credit?

You may be able to find a card with bad credit; however, chances are you won’t be able to borrow much from it. And in some cases, that can be fine—for debt that only adds up to a few hundred dollars. 

However, you’ll need a balance transfer credit card with a higher credit allowance if you have a substantial amount of credit card debt. The good news is that you can take steps to improve your credit score or add a cosigner or co-borrower to your application for an immediate solution. 

How Can a Balance Transfer Help My Credit Score?

A balance transfer can be an excellent move for your credit score. Because credit cards are revolving accounts, they impact both aspects of your credit utilization ratio (your available credit and existing balances). And so, when you transfer credit card debt, you will be really helping your credit utilization by increasing your available balance and, in a way, decreasing your credit card balances, even though there is a debt transfer. 

Another thing that a balance transfer can help improve is your payment history. With only one payment to worry about, you’ll have a better chance of making your monthly payments on time. 

Can Both of These Options Be Used to Consolidate Debt?

Yes, both a credit card and a personal loan can be used to consolidate credit card debt and in some cases, other types of debts (remember that most balance transfer credit cards can only be used for consolidating credit card debt). Choosing between a personal loan or balance transfer card is actually pretty straightforward once you dig into them and realize they are relatively different from each other. 

In most cases, a personal loan will work best to refinance a single loan, consolidate other loans, or for any emergency expense. While balance transfer cards are best used to pay off existing high-interest credit cards. 

FAQS on Balance Transfer vs. Personal Loan

Below are answers to commonly asked questions about a balance transfer vs personal loan:

How do interest rates for personal loans compare to those of balance transfers, especially when considering debt consolidation?

Interest rates for personal loans vary based on factors like credit score and loan amount. In contrast, balance transfers often offer introductory rates, which can be low but may increase after the promotional period, especially when consolidating high-interest debt.

Should I be concerned about a balance transfer fee with balance transfers, and how can it impact the overall cost of transferring credit card balances?

Yes, many balance transfers come with a balance transfer fee, typically a percentage of the amount being transferred. This fee can impact the overall savings, especially when transferring large credit card balances.

For how long do most balance transfers offer their introductory rates, and how does this period compare between balance transfers and personal loans?

The introductory period for balance transfers varies but typically ranges from 6 to 18 months. Personal loans, on the other hand, have fixed interest rates over their term, which can be more predictable than balance transfers.

Can personal loans be used for debt consolidation of various debts, not just credit card debt?

Absolutely! Personal loans are versatile and can be used for debt consolidation of various types, including medical bills and student loans, not just to consolidate credit card debt.

What are the consequences on my credit score if I miss a payment on a balance transfer card or a debt consolidation loan?

Missing a payment can result in late fees, increased interest rates, and a negative impact on your credit score. Some balance transfers may also revoke the introductory interest rate if a payment is missed.

How does the term of personal loans affect the monthly payments and total interest, especially when consolidating high-interest debt?

A longer loan term usually results in lower monthly payments but can lead to paying more interest over the life of the loan. A shorter term might have higher monthly payments but can be more cost-effective when consolidating high-interest debt.

Is it possible to consolidate balances from multiple credit cards to a single card or use a debt consolidation loan for the same purpose?

Yes, many balance transfer cards allow you to consolidate debt from multiple credit cards. However, the total transferred amount must be within the allowed limit of the balance transfer card. Similarly, a debt consolidation loan can be used to consolidate multiple credit cards into one manageable payment.

Can you use both balance transfers and personal loans to pay off debt at the same time?

Yes, both balance transfers and personal loans can be used together for debt consolidation, However, it’s important to pay attention to their terms and how they will impact your credit score. 

Key Takeaways With CreditNinja 

Both balance transfers and personal loans offer viable pathways to manage and reduce debt. While balance transfers provide an opportunity to consolidate credit card debts under a potentially lower interest rate, personal loans offer versatility, catering to a broader range of financial needs. 

The choice between the two hinges on your individual circumstances, the nature of the debt, and your financial goals. By weighing the pros and cons of each option with some help with CreditNinja and considering different factors you can make an informed decision. 

References:

  1. Debt In America: Statistics and Demographics | Debt.org

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