Balance Transfer vs. Personal Loan

You’re not sure when or how it happened, but your debt has suddenly become as difficult to manage as a litter of 10-week-old puppies.

You decide that it’s time. You’re no longer going to sit back while multiple debts hang over your head.

This is where debt consolidation comes in. 

In your search for options, you may come across 2 commonly used methods for debt consolidation: personal loans and balance transfer credit cards.  

Now you’re faced with the task of figuring out which option is right for you. But don’t worry, because we’ve put together some of the research for you to get started.

Understanding personal loans

A personal loan is money lent to an individual, usually paid back with interest in fixed, monthly payments over a set term. If the personal loan is unsecured, it means it does not require you to put up items you own, such as your car or home, as collateral to qualify for the loan. Instead, an unsecured loan is issued based on the borrower’s creditworthiness and ability to pay.

But how can a personal loan help you manage your debt?

One way that a personal loan can be used is to consolidate your debt by using the funds to pay off multiple of your outstanding balances. This means you could use the funds to pay off the balances on your high-interest credit cards—potentially securing a lower interest rate in the process.

Once you’ve consolidated with a personal loan, you have to make monthly payments for the life of the loan or until it’s fully paid back.

Understanding balance transfer credit cards

A balance transfer credit card is a type of card that allows you to transfer existing debt from one or more creditors to a new card.

These cards offer a promotional or introductory period where the interest rate on balance transfers is low, or even 0%, for a specified amount of time. In order to maintain this promotional rate, you usually have to make at least the minimum monthly payments before the due date.

Like with a personal loan, you can use a balance transfer credit card to consolidate multiple debts into one. In practice, you’re using your new credit card to pay off your other debts, typically with the objective of saving money on interest.

In order to most effectively save money on your interest payments, it’s very important that you pay attention to how long the promotional period lasts. When it ends, your interest rate will increase—probably by a lot.

Don’t immediately think you’ve found the best offer because you hear “0% interest rate”; do your homework and make sure you know all of the offer details.

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Using a balance transfer credit card is one way that you can consolidate your credit card debt. Like it sounds, balance transfer cards allow you to consolidate your debt by moving it over to a credit card that offers a low or 0 percent promotional interest rate on transferred balances for a given period. But, once that period ends, the applicable interest rate for that card will be applied to the balance, potentially leaving you right back where you started. And who wants to run in circles?

Which debt consolidation option is best for you: personal loan or balance transfer?

You’ve made it this far—now you want to make a decision about what’s right for you. If you are considering debt consolidation, think about the following things when comparing a personal loan to a balance transfer card:

1. The total amount and type of your debt

Once you total all of your debt, figure out how much you can reasonably afford to pay monthly so you know how long it will take to pay off. Then, check across your different financing options to find a lender or credit card that can consolidate that amount of debt.

While your lender will ultimately determine your monthly payment on a personal loan, and balance transfer cards have minimum monthly payments once a balance is accrued, if you know what you want to be paying before you start looking at options, it can help you in your selection process.

If you’re considering a balance transfer credit card and you cannot pay off your debt within the promotional period that’s being offered, you may want to look at other options in order to avoid paying a higher interest on the amount you can’t pay off during the promotional period.

Do you have debt from other lenders? Credit card debt?

This should be considered when deciding which option is a better fit for you.

Balance transfer cards often limit the types of debt you can transfer. For example, some may only allow you to consolidate credit card debt.

On the other hand, most personal loans allow you more flexibility in how you use the funds.

2. Repayment timeline

Having a repayment plan laid out in advance is essential: though your balance transfer credit card’s minimum payment may be lower than the monthly payment on a personal loan, you will likely need to pay more than the minimum to repay your debt within the 0% or low-interest grace period.

If financial discipline isn’t one of your strengths, the consistency of the payments and fixed rate of a personal loan could be beneficial for you. 

3. Getting approved

Lenders make decisions about whether or not to approve you for a personal loan and which interest rates you qualify for based on factors like your creditworthiness and ability to pay.

Getting approved for a 0% interest balance transfer credit card generally requires good or excellent credit.

Once you’re approved for the card, you still have to be approved for a high-enough credit limit to take on all of the debt you’re trying to consolidate and, of course, your credit score will also affect how much credit you’re allotted.

4. Impact on your credit score

If you make your monthly payments on time, consolidating with a personal loan could improve your credit score, since 35% of your FICO credit score is based on your on-time payment history.

Also, if you use your loan to pay off multiple credit cards, how much of your available credit you are using—a term called your credit card utilization ratio—can decrease (potentially to 0%), which could raise your credit score.

With a balance transfer card, your credit score could also increase—if you use the card correctly. While your score may initially take a hit from the large debt on the card, as you pay it down by making on time payments, the score could ultimately go up.

However, opening a balance transfer card could also hurt your credit score. This is because if you open a new account and close all of your existing cards (after paying them off), your credit utilization rate could increase to almost 100% on your new card, dragging down your score. And if you don’t make timely payments, that could pull your score down even further.

Other things to consider:

Payment Schedule

On a balance transfer card, you decide if you’re going to pay at least the minimum or more than that each month, since the payment schedule isn’t fixed.

While this may allow you more flexibility month to month, you still have to remember that your goal should be to pay off your debt before the promotional period ends.

By contrast, the monthly payments that you make on your personal loan are usually set from the start—hence the term “fixed monthly installments.”

Rate changes

For balance transfer cards, once your promotional period ends, your interest rate could go up dramatically.

For personal loans, the interest rate is usually fixed, meaning it won’t change over the life of your loan.

What about fees?

The fees sometimes attached to personal loans, like origination or late payment fees, will vary based on the lender that you choose. Certain lenders charge no fees, which is one of the reasons it’s so important to do your research about the terms of your loan while shopping around.

With many balance transfer cards, you have to pay something called a balance transfer fee, which usually costs between 3 and 5% of the total balance that you are moving. And, as with other credit cards, you have to watch out for fees on late or missed payments.

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A balance transfer fee is charged when you transfer your existing debt to a balance transfer credit card. It's typically between 3 to 5 percent of the total balance that you’re moving. Make sure you do your homework about those alluring 0 percent interest rate cards that seem too good to be true, because they probably are —kind of like that $10 mini fridge that didn’t end up having shelves.

Make the right consolidation choice for you

By consolidating your debt, it doesn’t disappear, but it does become easier to handle.

If you decide consolidation is right for you, be sure to research your options so you can start your journey to a debt-free life on the right foot.

This article is for informational purposes only and is not a substitute for individualized professional advice. Articles on this site were commissioned and approved by Marcus by Goldman Sachs®, but may not reflect the institutional opinions of Goldman Sachs Group, Inc., Goldman Sachs Bank USA or any of their affiliates, subsidiaries or divisions.