In a Nutshell If you want to consolidate and pay down debt, you may be considering a balance transfer credit card or a personal loan. Here’s how you can think through the decision to determine which option is right for you.
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If you have credit card debt or other high-interest loans you may be looking for ways to pay it off faster and cheaper. Two common options are balance transfers and personal loans. But how do you know which is the better choice for your situation?
In this comprehensive guide, we’ll compare personal loans and balance transfers on all the key factors so you can make an informed decision.
What is a Balance Transfer?
A balance transfer involves moving an existing credit card balance from one card to another. The goal is typically to take advantage of a lower promotional interest rate on the new card.
For example, you might transfer a $5,000 balance from a card charging 19% APR to one with a 0% introductory APR for 12-18 months. This pause in interest accumulation can help you pay more toward the principal.
Balance transfers may also be used to consolidate multiple card balances onto a single card to simplify repayment. However, the new card must have a high enough limit to accommodate the total transfer amount
Pros of Balance Transfers
- 0% intro APR for 6-18 months
- Pay more toward principal during intro period
- Potential to pay off debt faster
- Can combine multiple balances into one
Cons of Balance Transfers
- Balances typically revert to a higher rate after the intro period
- Limited to your credit limit on the new card
- Balance transfer fees usually apply
- Don’t address full debt load
What is a Personal Loan?
A personal loan provides an upfront lump sum that you repay in fixed monthly installments over a set term, usually 2 to 5 years. The loan proceeds can be used for any purpose, including consolidating and paying off credit card or other high-interest debt.
Personal loan amounts range from $1,000 to $100,000 depending on your income, credit score and lender caps. Interest rates are fixed and generally range from around 6% to 36%.
Pros of Personal Loans
- Fixed interest rates as low as 4-6% with good credit
- Predictable monthly payments
- May qualify for larger loan amounts
- Funds available quickly after approval
Cons of Personal Loans
- Interest accrues from day one
- Origination and prepayment fees may apply
- Early payoff usually not allowed
- Default can damage credit and lead to collection
Now that we’ve defined both options, let’s do a detailed feature comparison.
Balance Transfer vs. Personal Loan
| Feature | Balance Transfer | Personal Loan |
|---|---|---|
| Purpose | Transfer and pay off existing credit card balance | Consolidate debt or fund large purchases |
| Amount | Limited to credit limit on new card | $1,000 to $100,000+ |
| Rates | 0% intro APR (12-18 months typically) | 4% to 36% APR fixed |
| Fees | Up to 5% on transfer amount | Origination fees 1% to 8% |
| Payments | Minimum or fixed amounts | Fixed payments over loan term |
| Timeline | Revolving credit line | 2 to 5 year installment loan |
| Impact on credit | High, pays down balances | Medium, shows credit mix |
As you can see, each option has pros and cons. Next, let’s walk through some key considerations.
Which is Better for Paying Off Credit Card Debt?
For smaller credit card balances up to $5,000 or $10,000 that you can pay off in 12-18 months, a 0% balance transfer is likely the better option. You can make headway on the principal during the intro period before the standard APR kicks in.
However, balance transfers work best for short-term consolidation. Most intro 0% APR periods are 12 to 18 months. If you need longer to pay off your debt, a personal loan with a 2- to 5-year term will provide lower fixed rates for the life of the loan.
Additionally, personal loans allow you to consolidate larger balances from multiple credit cards into one predictable monthly payment. If you have $15,000 or more in credit card debt, a personal loan is likely the cheaper route.
Credit Score Impact
Both options can help improve your credit utilization ratio by paying off revolving credit card balances. However, balance transfers have a greater positive impact overall.
As you pay down your balance each month, your credit utilization on that card decreases, which can boost your credit scores. Managing a credit card responsibly by making on-time payments shows lenders you can handle revolving credit too.
With a personal loan, you benefit from adding installment loan experience to your credit mix. The on-time payments help your payment history as well. But you aren’t decreasing a credit utilization ratio each month like with a balance transfer card.
Which Option Has Lower Rates?
Balance transfers offer 0% introductory rates for 6 to 18 months in most cases. This allows you to pay down principal without accruing interest. As long as you pay off the full balance by the end of the intro period, you incur no interest cost.
However, if any balance remains after the intro APR expires, it will revert to the standard purchase rate on the card, usually between 15% and 25%. So you need to be sure you can pay it off in full when the 0% rate ends.
Personal loan rates currently range from around 4% to 36% on average, depending on your credit score and lender. With excellent credit (720+), you can qualify for rates as low as 4% to 8% fixed. This consistent low rate over 2 to 5 years can save substantially on interest versus higher credit card rates.
The Bottom Line
Here are some final tips on when to choose a balance transfer or personal loan:
- Smaller balances (<$5k) – Use a 0% balance transfer card to pay off in 6-18 months
- Larger balances (>$10k) – Consolidate with a 2- to 5-year personal loan
- Short-term payoff – Harness balance transfer intro 0% APR periods
- Long-term payoff – Benefit from a personal loan’s fixed rates
- Maximize savings – Use balance transfers for some cards and a personal loan for others
As you can see, the choice depends largely on your specific debt situation and needs. With some strategic planning, you may be able to use both tools synergistically to achieve your goals and maximize savings.
Can I Get a Personal Loan with Bad Credit?
While the best personal loan rates require good or excellent credit (690+ score), you can sometimes qualify with a score as low as 600. Shopping on online lending marketplaces can match you with bad credit lenders offering higher-rate personal loans.
What Credit Score Do I Need for a Balance Transfer?
Most balance transfer offers require a 670 credit score or higher. Some credit cards may approve balances with a score of 650 or 660, but options are limited. Those with poor credit below 640 will likely need to improve their score first.
Is There a Difference Between a Secured and Unsecured Personal Loan?
Unsecured personal loans are more common and do not require you to put up any collateral. To get a secured personal loan, you provide an asset like a savings account or car as security, allowing you to qualify for a larger loan or lower rate.
Can I Get a Personal Loan and a Balance Transfer?
Yes, it’s possible to get both a personal loan and a balance transfer. For example, you may use a personal loan to consolidate large credit card balances while using a balance transfer for a single card with a very high rate. The combination allows you to maximize interest savings.
Final Thoughts
When used strategically, a personal loan and balance transfer can form a powerful one-two punch to help crush high-interest debt. Take the time to carefully weigh the pros, cons, costs, and benefits of each option. Understanding how each tool works will allow you to make the smartest choices for your financial situation.
Balance transfer vs. personal loan: A quick comparison
Both balance transfer credit cards and personal loans might help you lower the interest rate on your debt and consolidate your outstanding payments into a single one, so you’ll have fewer bills to manage.
As we mentioned, balance transfer cards that offer low introductory balance transfer APRs may be an appealing option. If you can move your existing balances to the balance transfer card and pay off the debt before the introductory period ends, you might be able to avoid interest altogether and therefore pay off your debt faster and cheaper. Just keep in mind that the intro balance transfer offer is temporary and that your APR will increase after that period of time.
If you need a larger loan amount, or prefer to pay back what you borrow over a longer period of time, a personal loan may make more sense for your situation. Additionally, the interest rate the loan offers may be lower than a credit card’s standard rate. That’s especially true if you got the credit card when you had less-than-stellar credit and are paying a sky-high APR.
With all that in mind, let’s take a quick look at how balance transfer credit cards and personal loans differ. These are common ranges and terms, but you may find an option that differs from what’s shown below.
| Balance transfer credit cards | Personal loans (installment, unsecured) | |
|---|---|---|
|
Fees |
Balance transfer fee of 0%, 3% or 5% of the amount transferred |
Origination fee of 0% to 8% of the loan amount |
|
Credit limit or loan amount |
$300 to $15,000+ |
$1,000 to $100,00 |
|
Interest rate |
Potential introductory balance transfer APR during a set period of time, then a regular balance transfer APR that’s variable and subject to change as the prime rate changes |
5.99% to 35.99% APR |
Now let’s consider seven questions to ask when comparing a balance transfer and a personal loan.
What fees will I need to watch out for?
Balance transfer cards usually charge you a balance transfer fee of 3% to 5% of the amount transferred, often with a minimum fee of $5 to $10. You can sometimes avoid this fee by finding a card that doesn’t charge the fee, or temporarily waives it for new cardholders. Finally, one thing to keep in mind is that some balance transfer cards also charge an annual fee.
Personal loan lenders may charge you an origination fee that typically ranges from 1% to 8% percent of the amount you borrow. Although it’s less common, personal loan lenders may charge an application fee or a prepayment penalty if you pay off the loan early. The fees vary from one lender to the next, so comparison shopping for a loan may be worthwhile.
BALANCE TRANSFER v. DEBT CONSOLIDATION LOAN – are any right for you?
FAQ
Is it best to do a balance transfer or personal loan?
Do balance transfers hurt your credit?
What is the downside of a balance transfer?
Does personal loan balance transfer affect credit score?