Balance transfer or personal loans: What is best?

Understanding balance transfer credit cards

A balance transfer credit card lets you move outstanding debt from one or more credit cards onto a new card with a low or 0% introductory APR. With all of your debt on just one credit card, your balances can be much easier to manage. Plus, you could save on interest with the introductory interest rate that balance transfer credit cards typically offer.

Expect to pay a 3% to 5% balance transfer fee

Generally, balance transfer cards offer 0% APR for anywhere from six to 21 months. During this intro period, you won't have to pay interest on the transferred balance, which will help you chip away at the principal faster. That said, once the introductory period ends, you’ll still incur interest on any remaining balance at your card’s regular APR.

Not everyone is eligible for a balance transfer credit card, though. Card issuers usually want to see good or excellent credit (670 and above) on your application. Even if you can get approved, getting a balance transfer credit card may not always make financial sense.

For example, if you can’t realistically pay off the debt during the introductory period, you could rack up even more debt once the 0% APR ends and interest kicks in again. Also, balance transfer cards come with balance transfer fees, which are typically around 3% to 5% of the transferred amount.

Exploring personal loans for debt consolidation

Another popular option for consolidating debt is a personal loan. A personal loan is an installment loan you can use for nearly any purpose, including debt consolidation. If you’re approved for a personal loan, you’ll receive a lump sum and repay it over time in fixed monthly installments, usually over two to seven years.

Personal loans are typically unsecured, which means they require no collateral and rely solely on the borrower's creditworthiness. As a result, you may have to pay a higher interest rate since these loans are riskier for lenders. You generally need a credit score of 580 or higher to qualify for a personal loan, but the higher your credit score, the better your loan terms.

What’s the difference?

Unlike balance transfer credit cards, personal loans don’t offer a 0% interest period. That said, they can still be an option worth considering if you have a longer repayment timeline, need to consolidate a large amount of debt and prefer predictable monthly payments.

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Comparing balance transfer cards and personal loans

Overall, personal loans typically have longer loan terms and offer fixed repayment timelines, whereas balance transfer credit cards allow more flexible (but potentially risky) repayment schedules. Both can affect your credit score temporarily due to hard inquiries, but can also improve your credit over time if you use them correctly.

Here’s a quick comparison to help you decide between a balance transfer card and a personal loan.

Factors to consider when choosing between the two

Both balance transfer cards and personal loans can help you tackle debt, but one may be a better fit for you than the other. Here’s what to think about when you’re weighing your options.

• Total cost of borrowing: Another thing to consider is how much the loan or card will cost you over time. Balance transfer cards can come with transfer fees and high interest rates once the intro period ends. And if you take out a personal loan, you’ll want to consider additional fees like origination fees and application fees that could add to your total borrowing cost.
• Repayment timeline: Before choosing between the two, Cox recommends asking yourself how long you’ll realistically need to pay off the debt. If you could realistically repay your debt within two years, a balance transfer card can make more financial sense. “If not, a fixed-rate personal loan with a structured payoff plan might actually save you more in the long run,” she said.

Real-life scenarios and examples

As mentioned earlier, whether a balance transfer card or a personal loan is the better choice will depend on factors like your credit score and repayment timeline. Here are two examples to give you a better idea of when each option makes more sense.

1. Let’s say Maria has around $5,000 in credit card debt and a 745 credit score. She moved back home to save money and can commit to paying off her entire balance within 10 months. In this case, a balance transfer card makes more financial sense than a personal loan. With 0% APR for 18 months, she gets to save hundreds in interest, even after paying a 3% transfer fee.
2. James, on the other hand, has over $40,000 in credit card debt spread across four cards. He only has about $800 a month to put toward debt repayment. Plus, his credit score is only 620. Given his less-than-ideal credit, he most likely won’t qualify for a balance transfer card with a 0% APR. And even if he did, it’d be pretty difficult to pay off that much debt within the typically 6- to 21-month promo period. So, a personal loan is the more realistic option here.