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.Balance transfer vs. personal loan: What’s the difference?
Both balance transfer credit cards and personal loans can help you lower the interest rate on your high-interest debt and consolidate multiple payments into a single one, meaning you’ll have fewer bills to manage.
Credit cards that offer low introductory balance transfer APRs may be an appealing option. If you can move your existing balances to a low- or zero-APR balance transfer card — and pay off the debt before the introductory period ends — you might be able to avoid interest altogether and pay off your debt faster.
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. This is especially true if you can get a personal loan at a lower interest rate than you’re paying on your existing debt. And if your credit has improved over time, your chances of qualifying for a better interest rate may have improved too.
Balance transfers vs. personal loan: Quick comparison
| Balance transfer credit cards | Personal loans | |
|---|---|---|
| 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 $100,000 |
| Interest rate | Potential intro balance transfer APR during a set period of time (as low as 0%) | 5.99% to 35.99% APR |
Four questions to ask when comparing a balance transfer and a personal loan
1. What type of debts do I have?
If you’re looking to consolidate different types of debt, a personal loan may offer more flexibility.
Personal loan: While lenders may place a few limitations on how you can use the money, you’ll either receive the funds directly into your bank account to pay off creditors yourself, or you may be able to have the lender do that for you.
Balance transfer: If your debt is mostly made up of credit card debt, a balance transfer might be the easy way to move debt from your existing cards to a credit card that’s offering a low introductory balance transfer APR. Just be aware that many card-issuing financial institutions require the debt to come from a card issued by a different company to be eligible.
2. How much debt do I have?
There’s no guarantee that a balance transfer card or personal loan will approve you for an amount that will cover all your current debts, until after you formally apply.
Personal loan: You might be able to get an estimate by applying for prequalification, which isn’t a guarantee, but it can give you an idea of whether you might be approved.
Balance transfer: Some credit cards have a minimum credit limit. But generally, you’ll need to formally apply and get approved to find out what your credit limit will be.
3. How much interest will I pay?
Personal loan: While lenders don’t generally offer a promotional interest rate period, interest rates may be lower than a credit card’s standard interest rate.
Balance transfer: If you can pay off the entire debt before the introductory balance transfer APR period ends, a balance transfer may be your least expensive option. After the promotional period expires though, any remaining balance will start to accrue at the card’s standard balance transfer APR, which will vary from card to card.
4. What fees will I need to watch out for?
Balance transfer: Cards usually charge a balance transfer fee of 3% to 5% of the amount transferred. One thing to keep in mind is that some balance transfer cards also charge an annual fee. Heads-up: With some balance transfer cards, you lose your promotional interest rate if you miss a payment, you pay less than your minimum payment, or you make even a single purchase on the card.
Personal loan: Lenders may charge you an origination fee, typically in the range of 1% to 8% of the amount borrowed. Although less common, there may also be an application fee or a prepayment penalty. Fees vary from one lender to the next, so comparison shopping is worthwhile.
Bottom line
You can use either a balance transfer credit card or personal loan to consolidate debts or lower the interest rate on your debt. Consider your circumstances, any potential fees associated with the method you selected, and which option will best align with your budget. Then, compare cards or lenders to find the option with the most-favorable terms for your situation.