Balance transfer vs. personal loan: Which will work best for you?

Woman sitting on a couch thinking about whether she should get a personal loan or do a balance transfer. Image: Woman sitting on a couch thinking about whether she should get a personal loan or do a balance transfer.

In a Nutshell

Before choosing between a balance transfer and a personal loan, consider your circumstances, the fees and the potential effects on your credit.

Louis DeNicola is a personal finance writer and has written for American Express and Discover. Editorial Note: Credit Karma receives compensation from third-party advertisers, but that doesn’t affect our editors’ opinions. Our marketing partners don’t review, approve or endorse our editorial content. It’s accurate to the best of our knowledge when posted. Availability of products, features and discounts may vary by state or territory. Read our Editorial Guidelines to learn more about our team.
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Whether you have a single line of credit or are juggling several monthly debt payments, you may be considering a balance transfer credit card or a personal loan.

Using either method, you might be able to lower the interest rate on your debt or consolidate your debts into a single loan so you’ll have fewer bills to manage.

Balance transfer cards may appeal to consumers because they often have a low introductory offer — think 0 percent APR — for a set period of time.

Banks, credit unions, peer-to-peer platforms and online lenders may issue personal loans. The interest rate on the loan may be lower than a credit card’s standard rate. Typically, you’ll pay back the loan in monthly installments over a period, often one to five years.

But how can you know which option is best for your personal situation? Here are six questions to consider when comparing a balance transfer vs. personal loan.

1. What type of debts do I have?

If you’re looking to consolidate different types of debt, you may get the most flexibility with a personal loan because you’ll usually receive a lump sum in your bank account that you can use to repay any lender.

Balance transfer credit cards may have restrictions on what type of debt you can move to the card. You can usually transfer credit card debt to a balance transfer card, but some card-issuing financial institutions require the debt to come from a card issued by a different company. And only some balance transfer cards allow you to transfer other types of debt, such as a student loan, auto loan or mortgage.

2. How much debt do I have?

There’s no guarantee with either a balance transfer card or a personal loan that your loan amount or credit limit will cover your current debts. However, even if you can’t pay off or transfer all your current debt, one possible place to start is by eliminating your debt with the highest interest.

3. How much interest will I pay?

A balance transfer card may be the least expensive option if you can pay off the entire debt before the introductory period ends. If you don’t repay all the debt, you’ll accrue interest on the remaining balance at the card’s standard APR — often 12 to 23 percent depending on your credit.

Personal loans don’t generally offer a zero interest promotional period, but the interest rate on personal loans may be lower than a credit card’s standard interest rate. One example is SoFi’s personal loans, which have a fixed-rate range of 5.5 (with automatic payments) to 10.24 percent based on the loan’s terms and your financial profile. As of December 23, 2015, the national average interest rate for credit cards was 15.05 percent.

4. What fees will I need to watch for?

Balance transfer cards usually charge you a balance transfer fee of 3 to 5 percent of the amount transferred, often with a minimum fee of $5 to $10. Some balance transfer cards also have an annual fee.

Common credit card fees and how to avoid them

Personal loan lenders may charge you an origination fee or closing cost — typically a $50 to $75 flat fee or 1 to 5 percent of the amount lent. Depending on the lender, there may also be an application fee or a prepayment penalty if you repay the loan early. The fees vary from one lender to the next, and comparison shopping for a loan may be worthwhile.

5. How will this affect my credit?

Applying for a new credit card or a personal loan can affect your credit score in several ways.

An application for a new card or loan may hurt your credit initially as the issuer or lender will likely check your credit and perform a hard inquiry. The inquiry stays on your credit report for up to two years, although it generally only affects your score during the first year.

On the other hand, having a mix of credit types can be beneficial to your credit. Credit cards are revolving credit accounts, while personal loans are installment accounts; having a mix of account types is a small factor in determining your credit score.

An important factor in determining your credit score is the amount of available credit that you use on your credit cards, known as your utilization rate. Credit-scoring systems generally consider low utilization better and may look at utilization on individual credit lines or overall. Paying off several credit cards with high balances and moving the debt to a single new loan or credit line may help your credit by lowering your credit card utilization rate. Closing paid-off accounts may negatively impact your credit, however, as your overall utilization rate will increase.

It almost goes without saying that how you handle a new loan or credit card is an important factor in your credit too. A single missed payment on your credit report could have significant negative effects on your score.

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6. What is my repayment plan?

Financial educator Jackie Cummings Koski of Money Letters 2 My Daughter says a balance transfer card with a zero interest promotion may be the most inexpensive

"You want to be disciplined enough to pay off the balance before the promotional period is over."

Jackie Cummings Koski, financial educator

repayment plan, but warns that your behavior can play a big factor. She warns that “you want to be disciplined enough to pay off the balance before the promotional period is over.”

Your monthly payment on a personal loan may be higher than the minimum payment required on a credit card, which may lead to cash-flow problems if you’re used to lower credit card payments. However, you’ll likely need to pay more than the minimum if you want to repay the card’s balance before the promotional period ends.

Cummings says with balance transfer cards, “A good strategy is to set up an online bill pay and nickname it with the month the offer ends.” She also recommends calculating how much you need to pay off each month in order to repay the balance in full by the time the promotional period ends. You can use a debt repayment calculator to help determine how much the monthly payments need to be.

Bottom line

Personal loans and balance transfer credit cards are two financial tools you may be able to use to consolidate debts or decrease the interest rate on your debt. Before choosing a loan or a card, consider your circumstances, the fees and the potential effects on your credit.

About the author: Louis DeNicola is a personal finance writer and has written for American Express and Discover. In addition to being a contributing writer at Credit Karma, you can find his work on Busine… Read more.