Balance Transfer vs. Personal Loan: Which Is Better?

Wondering what the difference is between a balance transfer and a personal loan? A balance transfer involves rolling over the balances of one or more credit cards to another loan to consolidate credit card debt and benefit from a better interest rate. On the other hand, a personal loan is a lump sum of money borrowed from a bank that you can use for almost any purpose, including debt consolidation.

Knowing the difference between a balance transfer and a personal loan can help you determine what’s best for your needs.

What is a balance transfer? A balance transfer is the process of moving the balance of one or more credit cards to a single new card with a better interest rate. These new cards are called balance transfer credit cards and are offered by credit card providers.

Generally, a balance transfer credit card sports an introductory 0% APR for the first few months of the card, with the duration varying depending on the issuer. That introductory APR allows you to focus on repaying your balance without interest — at least for a time — and is a popular way to address high-interest credit card debt from one or several cards. However, to do this, lenders may charge a balance transfer fee, which is the cost to transfer the balance from other cards.

Similar to other credit cards, balance transfer cards are repaid on a monthly basis, with the minimum amount set in the agreement. If these payments are not made, your credit score will be heavily impacted, and your account will default. Some providers may also send debt collection agents to retrieve what is owed.

Balance transfer cards are a great way to tackle high-interest debt, but there are a number of features that are important to consider before applying for one.

Transferring your credit card balance to a card that temporarily has no interest may seem tempting. But keep in mind that, as with any line of credit, there are pros and cons to balance transfers.

A personal loan is a lump sum of money borrowed from a bank, credit union or online lender that you can use for almost any purpose. For instance, a personal loan can be used to fund your home’s renovation, go on a vacation, consolidate multiple debts and more. However, how much you will be able to borrow and at what interest rate depends on the lender, your credit score, your income and other factors unique to you.

If you get approved for a loan, paying it off is done monthly, with the due date and amount set by the lender in your loan agreement. However, if you are late on your monthly payments, your lender may implement a late payment fee and report it to the credit bureaus, which can impact your credit score.

When managed properly, a personal loan can help you achieve myriad goals — from renovating your home to making debt management easier. However, understanding the general qualifications and the pros and cons of personal loans is essential before applying for one.

While this type of loan can be quite useful, it is essential to understand the pros and cons of personal loans before applying.

If you’re debating the merits of a balance transfer vs. a personal loan, know that the best choice will depend on your needs and circumstances. Here are a few factors to consider that may help you determine which one is best for you:

• Your qualifications: While both personal loans and credit cards consider your credit score, they also have different requirements based on the lender and provider.
• Your purpose: What do you need it for? If you’re aiming to make a big-ticket purchase, a personal loan may be the better option. However, if you want to consolidate multiple debts, both may be good options, depending on what you’re consolidating (credit card, loans or both).
• Your financial circumstances: Both personal loans and balance transfer cards are new forms of debt. While they can help you manage existing debt better, it’s important to determine if you are able to repay it and which one would be easier to repay.

Determining whether you should take out a personal loan or a balance transfer depends on your circumstances. Learn the ins and outs of balance transfers and personal loans through our frequently asked questions.