Balance Transfer or Personal Loan: What is the Right Fit for You?

If you’re like one of the nearly 90 million Americans who has found themselves in credit card debt, you may be wondering what your options are to get out of debt. Or you might already be familiar with the most common strategies for helping you pay off the debt faster: personal loans or balance transfers. The point is, you’re not alone and there are products out there that can help you manage your debt.

Personal loans for debt consolidation and balance transfer credit cards are the two most common strategies that can assist in lowering the amount of interest you owe and helping you pay off debt faster. Finding the right solution depends on your situation and financial goals. In both cases, eligibility and the interest rates you get depend on your creditworthiness.

Let’s break down these two popular methods to help pay down debt and save money along the way:

• Balance transfer credit cards: transfer debt from other sources and pay as low as 0%interest for an introductory period (typically 15-21 months). If you can manage to pay down your full debt during that introductory period, you can avoid paying interest, however there is usually a fee associated with the initial balance transfer.

• Personal loans: pay off your other debts at a lower interest rate. These loans can have lower interest rates than most credit cards, which allows you to save money on interest over the life of the loan.

Is a balance transfer the same as a personal loan? 

While there are similarities, a balance transfer is not the same as a personal loan. To begin with, balance transfers are linked to credit cards, whereas personal loans are not. A balance transfer credit card might be a suitable option if you wish to pay off high-interest credit card debt in a relatively short period of time. Personal loans, on the other hand, tend to serve as better long-term solutions. 

If you transfer an existing credit card balance to a new card with a 0% average percentage rate (i.e. APR or interest rate) offer, you need to pay off the entire amount before the end of the promotional period to avoid interest charges. After this period, any outstanding amount starts accruing interest at the card’s regular balance transfer APR.

If you wish to pay off your credit card debt over a prolonged period of time or if you need to repay a large debt, you may consider looking at what personal loans have to offer. While personal loans tend to allow you to borrow more funds than credit cards, they also can come with a comparatively low APR.

Should I get a balance transfer or a personal loan? 

When you need to pay off existing credit card debt, you really have three main choices: apply for a balance transfer credit card,  apply for a personal loan, or keep doing what you’re doing. However, determining what fits your needs requires attention to details such as the amount you owe, the interest you might need to pay, your creditworthiness and perhaps most importantly, your ability to make payments. 

• The amount you owe: Balance transfers are more applicable for paying off small debts since higher interest charges can kick in after the introductory period, while personal loans can help you clear significantly large debts over time. Unfortunately, whether you get a personal loan or a balance transfer credit card, you won’t know the limit you qualify for until your application is approved.

• Interest rates: Many balance transfers come with an introductory 0% APR for 12 to 21 months. However, any remaining balance starts accruing interest at a card’s regular APR once the promo period ends. While personal loans do not have 0% APR offers, their interest rates can be lower than the APRs of regular balance transfer credit cards. If you can manage to repay your entire debt before the end of a balance transfer credit card’s promo period, it might be the more cost-effective option.

• Fees: Credit cards with balance transfer offers usually charge 3% to 5% of the transferred amount as fees. If you get a personal loan, you might need to pay a loan origination fee of up to 6%, although some issuers have eliminated this fee. Depending on your loan provider, you might be burdened with a prepayment penalty if you wish to pay off the loan earlier than scheduled. Before moving forward with either option, you will want to be aware of any fees if you choose to pay early, especially for personal loans. 

• Creditworthiness: Qualifying for a balance transfer credit card usually requires good to excellent credit. On the other hand, people with average credit can choose from several personal loan options. Your credit score can also impact the interest rate you receive on a personal loan. 

• Repaying on time: With a balance transfer credit card, you have the option of paying any amount over the minimum monthly payment. With a personal loan, you need to make fixed monthly payments through the course of the loan. Take a look at how much you can afford to pay each month and determine if you might be able to repay all or a large chunk of the debt within a credit card’s balance transfer promo period. If you’re going the personal loan route, check the variation in monthly payments for different loan terms (interest rates, timeline to repay, amounts, etc.) to determine which fits your situation the best.

Pros and Cons of Balance Transfer vs. Personal Loan

There is no clear winner in the personal loan vs. balance transfer comparison because both have huge advantages and drawbacks. What is important in both cases is that you have a clear repayment plan in place before you decide on a course of action. Looking at the pros and cons of a balance transfer and personal loan can help you determine which one might work better for you.

Is there any reason I shouldn’t apply for a balance transfer credit card or personal loan?

While a balance transfer or personal loan can help you get out of debt, it’s not always the right fit. You probably shouldn’t get a balance transfer or personal loan if you have bad credit, struggle to manage credit cards, or don’t qualify for a good interest rate. Balance transfers do provide an available spending limit which allows for additional purchases and could increase your debt if spending habits aren’t monitored. 

Many individuals may not want to pursue applying for these options because they fear being rejected by the lending companies and taking a hit to their credit score. However, many lenders now offer pre-qualification processes that allow you to determine your rate and amount before running a hard inquiry. We recommend asking your loan provider or credit card company about a pre-qualification check before formally starting the application process. Most of the time they are offered online and can discreetly provide the estimated terms of your result.

You can use either a balance transfer credit card or personal loan to consolidate debts or lower the interest rate on your debt. But before making your decision, consider your circumstances (credit score, income, etc.), any potential fees associated with the method you selected, the potential effects on your credit, and which option will best align with your repayment plan. Then start comparing cards or lenders to find the best option with the most favorable terms for your situation.