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Balance Transfer or Personal Loan — Which Should You Use?

Should you use a balance transfer or personal loan to pay down credit card debt? Here’s how to decide.

September 21, 2022

Paying down high-interest credit card debt is a big financial goal for many of us. But with so many ways to do this, understanding which option is best for your specific situation can be tricky.

Two of the most common methods for paying off debt are balance transfer credit cards and personal loans. By understanding the differences between these options, you can determine whether a balance transfer or personal loan would be best for your needs.

In this article, we’ll compare balance transfer credit cards and personal loans so you can make an informed decision.

How balance transfer credit cards work

A balance transfer involves moving the balance from one or more existing credit cards to a new credit card with a lower annual percentage rate (APR). Balance transfer credit cards may also include a 0% interest rate APR offer during the introductory period. 

This introductory period typically can last from 6 to 21 months. It allows borrowers to potentially pay off their credit card debt without worrying about accruing additional interest charges.

Completing a balance transfer

Depending on the bank you use, you may be able to complete the balance transfer almost immediately or it may take up to three weeks. Because of this, cardholders should continue making the minimum payment on their existing card until the transfer to the new card is complete.

As part of this process, your account will typically be charged a balance transfer fee that is added to the existing balance. These fees most often range from 2% to 3% of your total balance being transferred or a set fee of up to $10. Lenders generally charge the higher of these two options. So, if you transferred a balance of $2,000 and the lender charged a 2% fee, you would have an additional $40 added to your balance on the new card.

Even with the balance transfer fee, the amount of your existing credit card debt and the time you need to pay it off often makes it less costly than accruing additional interest as you pay off your original card.

Potential drawbacks of balance transfer credit cards

Remember, the 0% APR is only valid during the original balance transfer offer. Once this promotional period ends, the card issuer will revert your account to the standard APR. So, if you don’t pay off the existing debt by the end of the promotional period, you will start accumulating interest on any remaining debt. 

If you use the new card for additional purchases or only make the minimum required payment, you may have difficulty paying off that debt in time. And if you fail to make on-time payments, the promotional rate could be voided.

Additionally, as with any other credit card, a balance transfer card may or may not add an annual fee to your expenses. However, many cards offer cash back or other rewards. These terms are clearly listed when applying for a card — look for a card with no annual fees and good rewards programs whenever possible.

Who can use balance transfer cards?

Balance transfer credit cards are generally used for credit card debt, but some issuers may allow you to transfer other types of debt as well. As with other credit cards, balance transfer cards have a credit limit, so you may not be able to transfer all your existing debt to the new card. If you can transfer all your debt, you may be left with little available credit to make additional purchases.

Most credit card issuers only offer balance transfer cards to individuals with high FICOcredit scores. So, you may not qualify for a balance transfer credit card if you have bad credit.

When to take out a personal loan for debt consolidation

Debt consolidation personal loans are unsecured loans that offer a fixed monthly payment and fixed interest rate based on a set repayment timeline. You can use these loans for several types of debt beyond credit card debt, including student loans or medical bills. 

Personal loans work by letting you take out a set amount of money and then using the loan amount to pay off your existing debts. You would then be responsible for paying off the personal loan.

Pros of using personal loans

These personal loans can be a great way to reduce the number of debt payments you have to worry about since accounts such as medical bills are closed out once you pay them in full. Plus, personal loans usually have lower interest rates than other debts, which can help you save money over the life of the loan.

Personal loans are used when you need a longer period of time or a larger loan amount to pay off your debts. Loan terms can range from one to six years. As of the first quarter of 2022, the average new personal loan amount was $6,656, and some lenders even offer loans as high as $100,000 — much higher than what can be made available with a balance transfer credit card.

You don’t need as high a credit score to qualify for a personal loan as you would with a balance transfer card, either. Even if you have bad credit, you may still be able to obtain a personal loan (though a better credit score might give you access to a higher loan amount). In addition, personal loans are usually processed relatively quickly, allowing you to pay off other debts promptly.


Potential drawbacks of personal loans

Many personal loan providers charge a loan origination fee that is a percentage of your total loan amount. If you are taking out a large loan, this could add several hundred dollars to your debt.

Unlike balance transfer cards, there is no 0% APR intro offer. Instead, you pay the same fixed interest rate for the entire life of the loan, which can still help you save money compared to keeping higher-interest-rate accounts. 

However, some lenders also charge prepayment penalties. This means trying to pay extra toward the loan after a financial windfall (like a bonus at work) could result in fees that cancel out the potential benefit of trying to pay off your loan early.

While a personal loan can help your credit score by diversifying your credit mix, it comes with all the potential pitfalls of any other type of debt. For example, late or missed payments will hurt your credit score and increase how much interest you owe. And because personal loans don’t offer flexible payment terms like a credit card, you should be sure that you can fit the new monthly payment into your budget.

Is a balance transfer or personal loan right for you?

With this overview of balance transfer credit cards and personal loans, we hope you can have greater confidence in deciding which option is best for helping you reduce your debt.

Ultimately, the right choice between a balance transfer or personal loan will come down to whether you have excellent credit, the type and amount of debt you owe and your ability to repay the new loan with its applicable fees and interest charges. With this information, you can choose the debt consolidation option that will work best for your needs.

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