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Personal Loan vs. Balance Transfer Credit Card: Which is the Better Way to Consolidate Debt

Personal loans and balance transfer credit cards can both be effective and low-cost ways to consolidate high-interest debt. But which works best? It will depend on several factors.

Key points

  • If you’re stuck with high-interest credit card debt, both debt consolidation loans and balance transfer credit cards can be a way out.
  • Personal loans (also sometimes called debt consolidation loans) work for people who need longer amounts of time to repay their debts.
  • Balance transfer credit cards work better for people with higher credit scores or smaller amounts of debt that can be repaid in full before the introductory offer ends.

Should I get a personal loan or a balance transfer credit card?

If you’re struggling with debt, both of these are good options. There are some key differences, though, so it’s important to understand how each works.

There’s no reason you can’t use both

If you’re organized and have a good credit score, you don’t need to choose one or the other. The lowest-cost way to get out of debt is to use both. The balance transfer credit card will allow you to make payments on your debt for 12 to 18 months without accruing interest. When that period is about to run out, apply for a personal loan and use that to pay off the credit card before the standard interest rate kicks in.

Pro tip: You can use the time while making payments on the credit card to boost your credit score as high as possible so that you will qualify for a personal loan with the lowest possible interest rate. A high credit score won’t just determine the interest rate you pay. Applicants with good credit are most likely to qualify for the best available loans with no origination fees or prepayment penalties.

Balance transfer credit cards vs. personal loans

Here’s a quick summary of how each option works:

Balance transfer credit cardPersonal loan
Time you have to repay debt18 months or lessUp to 20 years
Work best for:People with good creditPeople who need structured payments
FlexibilityMaximum Minimal
Monthly paymentVariableFixed
Interest rateLower for the first 12-18 months, then variable at around 20% APRFixed rate for the life of the loan.
FeesBalance transfer fee ranging from 3% to 5%; late fee if you miss a paymentMay or may not have an origination fee
Prepayment penaltyNoneMaybe
Read moreBest balance transfer credit cardsBest personal loans

Which works best for you?

It depends on your financial situation. There are a few key differences and considerations before you decide.

Nine things to consider when choosing how to consolidate your debt

Balance transfers and debt consolidation loans are similar in how they help you get out of debt, but some key factors help you figure out which will work best for you.

1. Your credit score

Applicants with FICO scores of 740 or higher will qualify for the best offers and lowest interest rates. 

Balance transfer credit card: If your credit score is lower than about 680, you will not qualify for the best balance transfer offers, and it may not make financial sense to pay the balance transfer fee to move everything onto that card, mainly if you know there is close to zero chance that you can pay off your debt in full during the intro period. 

Personal loan: If you have no realistic way of paying off your debt before the introductory offer ends, an installment loan with a longer repayment term, more flexible fixed interest rate and a fixed monthly payment will be the better option. The credit score requirements are a bit more relaxed. You’ll get the best rates if you have good credit, but there are lenders with no minimum credit score requirement who cater to borrowers with bad credit.

READ MORE: Debt consolidation loans for bad-credit borrowers

Pro tip: It’s possible to have an excellent credit score while also juggling a large amount of debt. As long as the borrower has a history of on-time payments, uses no more than 30% of their available credit and has an acceptable debt-to-income ratio, overall debt will have a minimal effect on your credit score.

 2. Fees 

Balance transfer offers sound too good to be true, but you’re actually paying for the opportunity not to pay interest for the length of that introductory rate period.

Balance transfer credit cards: These tend to charge a set fee of 3% to 5% of the total amount you transfer. This is calculated per transfer, not based on total debt, so if you’re planning to use the card to transfer several debts, it could be more expensive than transferring one larger debt.

For example, if you transfer one $10,000 loan to a new card with a 0% APR for 18 months, you might pay a 5% balance transfer fee of $500. But if you transfer four $2,500 loans, you’d pay $125 per loan (a total of $600).

Pro tip: Some credit cards also charge an annual fee, which would increase the overall debt repayment cost.

Either one of these transfer fees would still be less expensive than an 18-month personal loan at 8.49%; you’d pay $685 in interest. But in order to pay off the loan during the 0% APR period, you’d have to make payments totaling roughly $580 a month. Otherwise, the balance transfer credit card becomes significantly more expensive than a personal loan.

Personal loan: A fixed-rate debt consolidation loan over that same 18 months would cost $685 in interest, making it more expensive than the balance transfer. Plus, the loan may include an origination fee or prepayment penalty which would further hike the cost to borrow. That calculation changes dramatically once the introductory offer ends. At that point, the debt consolidation loan becomes much less costly over time.

READ MORE: How to get your debt under control now

Pro tip: Make sure to check on the loan origination fee on your personal loan. Many traditional financial institutions and credit unions don’t charge an origination fee for personal loans, but online lenders can charge fees as high as 8%. Many traditional bankYou want to find the loan with the lowest interest rate, but also a loan with minimal fees.

3. Interest rates

After you’ve figured out whether you’d even qualify for a balance transfer credit card and how much it would cost, it’s time to examine the interest charges.

Balance transfer credit card: An interest-free loan sounds like an amazing deal, but the savings drop quickly once the introductory period ends. At that point, the APR will shoot up to a rate somewhere around 18% to 20%, and will be variable, meaning that if interest rates continue to climb, the cost of your loan will also increase.

However, no real options exist for a 0% APR personal loan. The average interest rate is hovering around 11%. Borrowers with exceptional credit may be able to beat that, but if there’s any chance of paying off your entire balance before your introductory rate expires, the balance transfer credit card will be your best option. 

READ MORE: Credit card interest rates

Personal loan: If your credit score is less than ideal, you won’t qualify for a 0% APR balance transfer. In that case, personal loans will allow you to consolidate your high-interest debts and the fixed rate will save you money. 

Pro tip: Make sure the personal loan has a lower interest rate than you currently pay. It won’t make financial sense to consolidate your debt using a loan with a higher interest rate.

4. Length of the repayment period

Balance transfer credit card: These offers expire after a predetermined timeframe, usually between 12 to 18 months, so they’ll work best for borrowers who can pay their debt in full during this window. Once that APR offer ends, the annual percentage rate shoots up, and the out-of-pocket cost to you will also increase. 

Personal loan: Debt consolidation loans can have a more extended repayment period. This can be as short as a year or as long as 20 years. And your payment and interest rate will be fixed, so you know exactly how much you need to budget each month and when you’ll be debt-free. This can be a powerful motivator.

READ MORE: Easy ways to consolidate credit card debt

5. Flexibility

Balance transfer credit card: The payment schedule offers more flexibility in case life happens and you need to pay a bit less toward your debt for a few months until you’re back on your feet.

Personal loan: These not only have a fixed interest rate for the entire loan term, but they also have a fixed payment. This gives you less flexibility if you experience a sudden financial hardship. You will still be expected to make your monthly loan payment. However, you’ll be able to track your progress, which can be a powerful motivator, and if you qualify for a low interest rate, you will start to see progress quickly.

READ MORE: Does debt consolidation close credit cards?

6. Loan amount needed

Balance transfer credit card: If the credit limit on your new balance transfer credit card is low, transferring all of your debt onto that card could push your credit utilization ratio too close to 100%. Because credit utilization is an important component of your credit score, your credit score could fall significantly.

Personal loan: You can choose the loan amount when you apply, so it’s guaranteed that there will be enough to cover your needs, provided you do the calculations. As a bonus, credit scoring models don’t count personal loans toward credit utilization, so consolidating all of your debt into one loan could lower your credit utilization to close to 0%, which would help your credit history.

Pro tip: You should always aim to keep your credit utilization to 30% of your available credit.

READ MORE: Easy steps to get out of payday loan debt

7. Monthly payment

Balance transfer credit card: The minimum monthly payment will generally be about 4% of the balance on the card. You can pay more than that, but you don’t have to.

Personal loan: This is a fixed amount determined by your loan amount and repayment term. You will have to make a consistent monthly payment for the life of your loan.

READ MORE: Best options to consolidate installment loan debt

8. Your financial discipline

Balance transfer credit card: If you can’t count on having the discipline to make monthly payments high enough to pay off the debt during the introductory period, this isn’t the best option for you. 

Personal loan: Because the loan amount is fixed, you will have to pay a certain amount each month, which can benefit people who need a little extra nudge to make the payments.

Pro tip: Neither option will be effective if you consolidate your debt to a lower interest rate but then continue to run up your newly paid-off credit cards. Debt consolidation will only work if you’re truly committed to getting out of debt.

9. The types of debt you need to consolidate

Balance transfer credit cards: These will be the best option if you’re primarily consolidating credit card debt, and none of the debt is from the same lender that issued your balance transfer card. 

Pro tip: You may not be allowed to transfer debt to a balance transfer offer from the same credit card issuer, such as debt on your Chase Sapphire card to a new credit card issued by Chase. The money would need to be transferred from different credit card issuers. The Chase debt could be transferred to a Citi or Discover card, for example.

Personal loan: These will be the better option if you have multiple types of debt, including payday loans, personal loans and some higher-interest private student loans.

Pro tip: You may not want to consolidate medical bills or student loans. You could miss out on government student loan benefits (like the debt repayment pause implemented during the COVID-19 pandemic), and debt collection rules for medical bills are less stringent because negotiating with insurers and medical providers takes time.

READ MORE: Debt consolidation vs. debt settlement

Still not totally sure how balance transfer credit cards work? Check out this video:

Other options for debt relief

It’s possible that you may not qualify for either of these options. If that’s the case, don’t worry. You still have some options. 

READ MORE: Are you drowning in debt? Here’s how to save yourself

The bottom line

The first step to success is admitting that you need to take action to get out of debt. But figuring out those initial steps can be daunting. Whichever form of debt consolidation you choose, the key is to add up everything you owe and calculate how much you need to borrow and how much of a monthly payment you can afford. 

After that, your best option should become pretty clear.

However, if you need some further guidance, DebtHammer can help. Contact us to schedule a free consultation and we will help you figure out a strategy.

FAQs

What is a prepayment penalty?

A prepayment penalty is a fee charged by a lender if you pay off a loan before the agreed-upon term or make larger payments than the scheduled amount. It is a way for the lender to recoup some of the interest or fees they would have earned if you had made payments according to the original loan agreement.

What should I do if I don’t qualify for either a balance transfer or personal loan?

Don’t worry! You still have a few options. First, if you’re facing an immediate financial crisis, contact your creditors and ask for a hardship exemption. A company that offers debt settlement services (like DebtHammer) can also help you figure out your next steps. If your debt is primarily due to credit cards, you could try contacting a credit counselor for advice. And if your situation is completely out of control, bankruptcy is an option.

Will I lose my home or car if I file for bankruptcy?

In a Chapter 7 bankruptcy, non-exempt assets may be sold to repay your creditors. Exemption laws determining which assets you can keep vary by state. However, if your equity in your home or car exceeds your state’s exemption limits, it’s possible your home or car could be sold and the proceeds from the sale used to repay your debts.
In a Chapter 13 bankruptcy, you typically don’t have to sell your assets. Instead, you propose a repayment plan and repay your debts over a period of time, usually three to five years. As long as you make the required payments, you can usually keep your home and car.

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