Personal loan vs. balance transfer card: Which is better?

If you’re looking to consolidate your debt, you may be wondering if a personal loan or balance transfer credit card is the better option. Both have their pros and cons, so it’s important to compare the two before making a decision.

Balance transfer credit cards can offer an interest-free period upfront, but they typically have higher interest rates than personal loans after the introductory period. And the introductory period is usually much shorter than the term of a personal loan.

Personal loans typically have stricter qualification requirements than other funding options, but they offer a fixed interest rate and predictable monthly payments. And with repayment periods of up to seven years, you may save more on interest charges in the long run, especially if you have a large debt that can’t be paid off during a balance transfer card’s promotional period.

It’s important to compare the two options and consider your financial situation before making a decision.

Balance transfer credit cards: Pros and cons

Pros

• Can save you money if you can pay off the balance within the 0 percent interest promotional period
• Consolidates your existing debt onto one card
• Can help your credit score in the long term
• Provides you with a revolving line of credit that you can use after you’ve paid off your transferred balance

Cons

• Most cards charge a balance transfer fee — usually 3 percent to 5 percent
• Regular APR after the promotional period may be higher than the APR on the card you’re transferring from
• Can hurt your credit score in the short term

Personal loans: Pros and cons

Pros

• Fixed interest rate
• Predictable monthly payment
• A personal loan can consolidate different types of debt

Cons

• Stricter qualification requirements than other types of funding options
• May come with fees and penalties that can drive up the cost of borrowing
• Can hurt your credit score in the short term

Which is better?

Both balance transfer credit cards and personal loans are popular methods to help pay down debt, and you can save some money along the way.

The key difference between the two is that balance transfer credit cards typically offer an interest-free period upfront, while personal loans usually have a fixed interest rate. And the regular APRs of balance transfer cards tend to be much higher than the interest rates of personal loans.

Additionally, balance transfers are good for paying off balances on one or two high-interest credit cards, while personal loans are typically used to consolidate multiple debts into a single fixed monthly payment.

Balance transfer cards usually have a 0 percent APR promotional period of 12 to 21 months, though the average regular APR for a credit card is over 19 percent. Personal loans typically have an interest rate of around 3 percent to 36 percent, with an average of 11.08 percent, according to Bankrate.

A personal loan term can vary in length, but terms of one to seven years are common. A balance transfer card could offer greater interest savings if you are able to pay off the debt within the shorter term (less than two years, for example). A personal loan might offer more flexibility if you need more time to pay off the debt, even though you won’t avoid paying interest.

What are the credit requirements?

If you’re interested in a balance transfer credit card, you typically need a good to excellent credit score (at least 670) to qualify. That said, there are some balance transfer credit cards available for applicants with fair credit (a score of 580 to 699).

Personal loans tend to have more stringent approval standards than other types of funding options, and you may not qualify for one if you have a low credit score. Good credit is preferred, but lender requirements vary.

If you can’t qualify for a balance transfer card or a personal loan, consider non-profit debt management to consolidate payments and lower your interest rates. Depending on who you owe, a debt management plan can reduce your APRs into the single digits. However, your included accounts will be closed.

How will debt consolidation affect my credit score?

Your credit score may take a temporary hit in the short term if you consolidate your debt through a balance transfer or personal loan. This could be a result of a hard inquiry, which causes a minor drop in your credit score. A new account can also lower your length of credit history by decreasing the average age of your accounts, though the impact may be limited if you have other older accounts in your credit report.

In the long run, however, your credit score should improve if you practice good credit habits. A new balance transfer card can lower your credit utilization ratio by giving you more overall available credit. You’ll continue to improve your credit utilization and the even-more-important payment history category as you reduce your balance with on-time payments each month. Over time, the initial impact of the hard inquiry on your credit report will diminish.

A personal loan can also improve your credit utilization ratio if you use it to pay off a credit card, since installment loans aren’t factored into it. And adding a loan to your credit report can help you in the credit mix category, which demonstrates to lenders that you are able to handle different types of accounts.

Your credit score will likely fall, however, if you miss a payment or start running up new balances on the credit card that you paid off with a balance transfer or personal loan.

What fees are associated with each option?

Balance transfers typically come with a fee of 3 percent or 5 percent of the amount transferred, often with a minimum fee of $5 to $10. You’ll also be charged a late fee of up to $41 if you make a payment past the due date.

Some personal loans come with an origination fee, which is a percentage of the loan amount. While this is typically wrapped into the loan amount, it can impact the total cost of borrowing. Depending on the lender, you could also pay a late fee or a prepayment penalty.

Bottom line

Balance transfer credit cards and personal loans are both popular methods to help pay down debt and save money along the way.

If you’re looking to consolidate your existing debt onto one card and save money on interest, a balance transfer credit card may be the right funding option for you. However, personal loans can help you pay off a large balance (or more than one type of debt) with a fixed interest rate and predictable monthly payments.

Whichever option you choose, it’s important to focus on paying down your debt and avoid taking on more. Start by creating a budget that includes your monthly card or loan payment and look for ways to save or cut back on other expenses.