Balance Transfer Credit Cards vs Personal Loans: How To Choose The Right Debt Consolidation Option

Consolidating and paying down debt is a top financial priority for many people. Two popular options for consolidating debt are balance transfer credit cards and personal loans. But how do you decide which one is the better choice for your situation?

In this article, we’ll compare the key differences between balance transfer cards and personal loans to help you determine the better debt consolidation method based on your specific needs and circumstances

Overview of Balance Transfer Credit Cards

A balance transfer credit card allows you to transfer outstanding balances from other credit cards over to the new card. Many balance transfer cards offer an introductory 0% APR on balance transfers for 6-21 months.

During the 0% intro period, all your payments go towards reducing the principal balance rather than interest. This can help you pay off debt faster and cheaper.

However balance transfer cards typically charge a one-time balance transfer fee of 3-5% of the amount transferred. And when the intro 0% APR period ends the ongoing APR often jumps to a much higher rate.

It’s critical to pay off the entire transferred balance before the intro period expires. Otherwise, any remaining balance will start accruing interest at the standard rate.

Overview of Personal Loans

With a personal loan, you receive a lump-sum of cash upfront and repay it in fixed monthly installments over a set repayment term. Loan terms are generally between 2-7 years.

The interest rate on a personal loan is fixed for the full repayment period. Rates often range from 5.99% to 35.99% APR depending on your credit score and other factors.

Personal loans don’t offer an intro 0% rate, but the ongoing interest rate is usually lower than a credit card’s standard purchase rate.

You can use a personal loan to consolidate various debts like credit cards, medical bills, or other loans. The lump-sum is deposited into your bank account to use as you wish.

Key Factors to Consider

Here are some key factors to weigh when deciding between a balance transfer card and personal loan:

1. Total Debt Amount

• Balance transfer cards generally have lower credit limits, often $1,000-$15,000.

• Personal loans offer higher loan amounts, usually $1,000-$100,000.

If you need to consolidate a large total debt load, a personal loan may allow you to consolidate it all under one loan.

2. Types of Debt

• Balance transfers work best for consolidating credit card balances. Most cards don’t let you transfer other debt types.

• Personal loans offer more flexibility. You can use the lump-sum to pay off credit cards, medical bills, loans, etc.

3. Credit Score Requirements

• Balance transfer cards typically require good to excellent credit (680+ score).

• Personal loans may approve borrowers with fair credit or lower (as low as 580 score).

If you have less-than-perfect credit, a personal loan is more likely to approve you.

4. Interest Cost Savings

• Balance transfer cards offer temporary 0% intro APR, but it jumps sharply after.

• Personal loans have higher ongoing rates, but they’re fixed for the full loan term.

Run the numbers to see which option offers more interest savings based on your payoff timeframe.

5. Repayment Term Flexibility

• Credit cards have revolving terms. You can pay the minimum or pay off faster.

• Personal loans have fixed monthly payments for a set number of years.

If you want a structured plan, personal loans offer predictable repayment schedules.

6. Fees

• Balance transfer cards charge a one-time transfer fee of 3-5% typically.

• Personal loans may have origination fees of 1-8%. Some lenders don’t charge fees.

The total fees vary, so compare offers closely.

7. Impact on Credit Scores

• Balance transfers don’t show as a new “loan” account on your credit reports.

• Personal loans add an installment loan account which diversifies your credit mix.

If you lack installment loan history, a personal loan can help build your credit mix.

When a Balance Transfer Card May Be Better

Here are some situations where a balance transfer card could be the better option over a personal loan:

• You have excellent credit and qualify for a card with a long 0% intro APR period
• You have a relatively small amount of credit card debt to consolidate
• You’re confident you can pay off the full transferred balance within the intro 0% period
• You want to keep monthly payments flexible rather than fixed
• You want to avoid another hard inquiry on your credit from a loan application

A balance transfer makes most sense if you can pay off your debt before the 0% rate expires. It’s risky to transfer balances if you’ll still carry a balance post-intro period.

When a Personal Loan May Be Better

Here are some examples of when a personal loan may be the better debt consolidation choice compared to a balance transfer:

• You have only fair/average credit, unlikely to qualify for a great balance transfer offer
• You have a large total amount of debt to consolidate
• Your debt comes from multiple sources (credit cards, medical, etc.) beyond just cards
• You want fixed monthly payments over a set multi-year term
• You want an installment loan on your credit history to demonstrate responsible repayment over time
• You expect to carry a balance past the intro 0% period, so a fixed lower rate is better

Personal loans make sense when you need to consolidate various debts, have a lower credit score, or want a structured repayment term. The fixed rate is attractive if you’ll need an extended timeframe to repay debts.

Other Alternatives to Consider

Beyond balance transfers and personal loans, a few other debt consolidation options to consider include:

• Credit counseling – Non-profit agencies can help negotiate lower interest rates on debts through a Debt Management Plan (DMP).

• 401(k) loan – Borrowing from your 401(k) is risky, but it’s an option if you have the plan available.

• Home equity loan/line of credit – Useful if you have equity available, but comes with risks like lowering your home’s value.

• Debt settlement – Debt settlement companies negotiate to settle debts for less than you owe, but this option comes with major credit score damage if you stop paying creditors.

• Bankruptcy – Declaring Ch. 7 or Ch. 13 bankruptcy eliminates many debts, but also severely hurts your credit and has lasting consequences.

• Balance transfer checks – Some credit cards issue checks you can use to pay off non-credit card debts and transfer balances.

• Refinancing existing loans – You may be able to refinance existing installment loans, like student loans or auto loans, to lower interest rates.

Always compare the risks and benefits before pursuing alternatives like borrowing from retirement, using home equity, or settling debts.

Choose the Best Option for Your Situation

There’s no one-size-fits-all answer to whether a balance transfer card or personal loan is the undisputed best debt consolidation method. It depends on your specific financial situation and needs.

Analyze how much debt you need to consolidate, your credit score, your income and budget, whether you need structured payments or flexible terms, and your ability to repay debts in full before intro periods end.

Crunching the numbers for projected interest costs, fees, and repayment terms can also help guide your decision. With a thorough comparison of your options, you can determine if a balance transfer card or personal loan better fits your debt consolidation needs.