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

Both balance transfer credit cards and personal loans may help you simplify your finances and save money. But figuring out which one is best for your situation isn’t always straightforward.

Balance transfer cards may be appealing because they often offer a low introductory balance transfer APR for a set period of time.

Personal loans, on the other hand, always come with some form of interest. But depending on your credit and other factors, you may get approved for a larger loan amount. And since personal loans often come with equal monthly installments that you pay back over a set period of time, it can be easier to budget for loan payments when planning your monthly expenses.

Let’s explore balance transfer cards and personal loans further so you can decide if one is right for you.

1. What type of debts do I have?
2. How much debt do I have?
3. How much interest will I pay?
4. What fees will I need to watch out for?
5. How will this affect my credit?
6. Do I have a repayment plan?
7. Have I considered all the options?

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.

Now let’s consider seven 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. 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 your personal loan lender do that for you.

If your debt is mostly made up of credit card debt, a balance transfer credit card might be the easy way to transfer debt from your existing cards to a credit card that’s offering a low introductory balance transfer APR. But many card-issuing financial institutions require the debt to come from a card issued by a different company. And remember, once that balance transfer APR expires you’ll be looking at an APR that’s much higher.

Some balance transfer cards also allow you to transfer money into a bank account or give you balance transfer checks that you can use to pay off all sorts of debts.

2. How much debt do I have?

There’s no guarantee that a balance transfer card or personal loan will approve you for a credit line or loan amount that will cover all your current debts. Generally, you won’t find out how much you’re approved for, if at all, until after you formally apply.

With a personal loan, you might be able to get an estimate by applying for prequalification. While this option doesn’t guarantee approval (or loan terms, like amount or rate), it can give you an idea of whether you might be approved. Lenders also have minimum loan amounts, which could help you hone in on which loan may be a good fit.

If you’re going the credit card route, it’s worth noting that some credit cards have a minimum credit limit. (Here are a few that have high minimum credit limits for those that qualify.) But generally, you’ll need to apply and get approved to find out what your credit limit will be.

Even if you can’t pay off or transfer all your current debt, you could start by eliminating your debt with the highest interest.

3. How much interest will I pay?

Many balance transfer cards offer an introductory balance transfer APR for balances that you transfer to the card. If you want to take advantage of an offer like this, just make sure to read the fine print to understand when the promotional rate will end. After the promotional period expires, any remaining balance that you transferred over will start to accrue at the card’s standard balance transfer APR. These rates vary from card to card and your credit will affect the rate that you might qualify for.

Personal loans don’t generally offer a promotional interest rate period, but the interest rate on personal loans may be lower than a credit card’s standard interest rate.

A balance transfer card may be the least expensive option if you can pay off the entire debt before the introductory balance transfer APR period ends. But sometimes, a personal loan can be a better option if you tend to charge a lot on your credit cards or want a structured repayment plan.

4. 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.

5. How will this affect my credit?

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

An application for a new card or loan will lower your credit scores by a few points at first because the issuer or lender will check your credit and perform a hard inquiry. But the impact can be minimal, and your scores will often rebound within a few months if no new hard inquiries — negative information — are added to your credit report.

Having a mix of credit types may be beneficial to your credit, depending on the credit-score model used to generate your score. Credit cards are revolving credit accounts, while personal loans are installment accounts. So if you don’t have an installment loan (such as auto, mortgage or student loan) in your credit history, a personal loan can help diversify your credit profile and potentially boost your credit scores.

Applying for a new credit card or personal loan will also impact your credit utilization rate, which is another factor that goes into calculating your credit scores. Lenders generally consider a utilization rate of 30% and under ideal. And credit utilization rates apply only to credit cards and not loans.

Paying off several credit cards with a personal loan can lower your credit utilization rate. Similarly, opening a new balance transfer card increases your available credit, which can also lower your credit utilization rate. Either option may help your scores, although the personal loan may have a greater impact.

Remember that how you handle a new loan or credit card is an important factor in your credit profile, too. Make sure to pay your new loan or credit card bill on time to avoid a missed payment, which could hurt your scores.

6. Do I have a repayment plan?

A personal loan will generally have a fixed monthly payment amount for a set period of time. But credit cards require only a minimum payment that’s due on your balance. If you make only minimum payments or add a balance beyond what you initially transferred over, you could wind up paying a lot in interest when your promotional period ends and see yourself further in debt.

You can compare the two options by first figuring out how much you’ll need to pay each month to pay off the balance during the introductory balance transfer APR period. You can use this debt repayment calculator on Credit Karma to help. Use the same calculator to find the potential terms of a personal loan, too.

Compare the result to see the difference between the repayment periods, monthly payments and total interest paid. Then, you can figure out which one better suits your needs and budget.

7. Have I considered all the options?

If you’re struggling with monthly payments or looking for savings, balance transfer credit cards and personal loans aren’t your only options.

• Nonprofit credit counseling organizations may offer debt management plans, or DMPs, if you have credit card debt. Counselors may be able to negotiate lower interest rates, payment amounts and waived fees, and you’ll make one payment to the counseling agency each month.
• You might want to refinance your debt using the same type of loan. For example, you can refinance a student loan with a private student loan or an auto loan with a new auto loan.
• Rather than moving debt to a new company, you could try negotiating with your current creditors to get a more manageable payment plan or lower rate.

Other options, such as taking on side gigs or finding ways to cut expenses to pay off the debt sooner, can also help. Although, you could use these in combination with one of the options that will decrease how much interest you pay to double-down on your repayment efforts.

Next steps

You can use either a balance transfer credit card or personal loan to consolidate debts or lower the interest rate on your debt. But before making your selection, consider your circumstances, any potential fees associated with the method you selected, the potential effects on your credit and which option will best align with your repayment plan. Then, compare cards or lenders to find the option with the most favorable terms for your situation.