Balance Transfer Card vs. Personal Loan

Research shows money is one of the main sources of stress for people in nearly every age bracket. One way to alleviate financial stress, especially if your high-interest debt is causing it, is to apply for a balance transfer or personal loan. 

Here are the differences between these two options, the fees to consider, and how to know which one is best for your personal finances.

Personal loan vs. balance transfer

When deciding between a balance transfer or personal loan to pay off your high-interest debt, consider the fees, the length of the loan, and the flexibility of repaying it.

How personal loans work

Personal loans are installment loans. That means you repay the loan in equal installments over a set period. To get one, fill out an application with a lender that offers personal loans and specify the amount you need. If approved, you will get a lump sum, which you can use to pay off your high-interest credit card debt.

Unlike car loans or mortgages, personal loans are unrestricted, which means you can use them for whatever you like. You can opt for a fixed interest rate and a set term, meaning your payments won’t fluctuate. As of March 2024, the average interest rate of a personal loan is 12.35%. 

That’s significantly lower than the average credit card interest rate of 22.8%. Remember that personal loans can come with origination fees, too. Lenders determine the cost of origination fees, but they are typically a small percentage of the amount you borrow.

Overall, personal loans can be a good way to clear credit card debt. The interest rates are typically lower than credit cards, and your credit score could increase because you’ll lower your credit card debt-to-credit ratio and add to your credit mix.

How balance transfer cards work

Balance transfer cards work by enabling you to transfer the balance of a high-interest credit card to another card with a promotional APR period. There is usually a fee for transferring a balance of 3% to 5% of your balance.

The transfer fee is usually worth it, as cards can offer 0% APR for up to 21 months. This runway helps consumers aggressively pay down debt since their payments go directly to the principal. Plus, getting a new balance transfer credit card can improve your credit score by increasing your available credit.

Remember, you’re not always guaranteed enough credit to consolidate your full credit card balance, and the promotional period is temporary. Your interest rate will increase if you don’t pay off your credit card within the promotional period.

Is a balance transfer or personal loan right for you?

Choosing between a balance transfer or a personal loan depends on your personal situation. Here are some examples.

When a balance transfer makes more sense

There are a few scenarios where a balance transfer makes more sense than applying for a personal loan. For example, a balance transfer would be better if you want flexibility regarding your payments because you can make a small minimum payment or a larger one.

If you want to pay off your debt quickly, a balance transfer is more motivating because the shorter promotional period encourages you to pay it off faster. Additionally, the 0% APR allows your payments to go further. 

If you’re disciplined with your money, a balance transfer is also a good option because you can pay off your debt quickly.

When a personal loan makes more sense

A personal loan makes more sense if you want a predictable monthly payment each month or if you struggle with money discipline. If you have a high debt-to-credit ratio and want to improve your credit score, a personal loan is preferable to a credit card because it frees up available credit and adds to your credit mix.

Additionally, if you’re worried you won’t be able to pay off your credit card before the promotional period ends or you have an uncertain economic outlook, a personal loan might be a better fit.

Expert’s take

Michael Menninger

CFP®

Whether you are disciplined with money and repayment affects the best method to choose. Specifically, if you are disciplined with money management, and you have a good credit score and high credit card debt, a balance transfer might be better than a personal loan because you can transfer your balance each time the interest rate spikes and pay the balance transfer fee, which may be lower in costs overall. However, borrowers with poor management skills tend to get a personal loan and then build up the credit card debt again.  

What if neither option is right for me?

If a balance transfer card or a personal loan won’t work for you, you have other options. You can consolidate debt with other loans or lines of credit, like a peer-to-peer lending loan, a home equity line of credit (HELOC), a home equity loan, or a home equity investment. 

You can sign up for a debt management plan or speak to a debt counselor, though these options have pros and cons, too. Temporarily taking on a side job can also help you aggressively pay down your debt.

Regardless of your choice, it’s important to consider your current financial situation, your ability to make regular payments, and your goals. While debt can be stressful, you’re not alone, and you have many choices for making your high-interest debt more manageable.

Expert’s take

Michael Menninger

CFP®

As a financial planner, my experience is to understand the spending habits of the debtor. A HELOC is a great choice because of the low rates, but it’s important to know if the debtor is serious about paying off debt or is simply looking for a bailout and will be straddled with debt again soon. Another alternative is a 401(K) loan because I would rather pay myself 5% to 6% interest than the bank 24% to 30% interest.