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.
A balance transfer involves rolling multiple balances on different credit cards into a new card with a lower interest rate.
A personal loan is a lump sum of money that can be used for almost any purpose.
Choosing between a balance transfer and a personal loan depends on whether you wish to consolidate debt, reduce interest or do something else.
What Is a Balance Transfer?
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.
Features of a Balance Transfer
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.
Providers will look at your credit score, income and other financial details to determine if you qualify for a balance transfer card. Generally, you must have at least a good credit rating to qualify, but this will depend on the provider.
Balance transfer credit cards often feature an introductory 0% APR for a certain period of time, ranging from six months to one year or more, depending on the provider. This allows you to pay off existing credit card debt without worrying about interest. After the introductory period, you will be subject to a fixed or variable APR, depending on the agreement with the provider.
A balance transfer card is repaid monthly, with a minimum amount set in the agreement with the provider. However, it is possible to pay above the minimum amount set to lower the principal balance.
Pros & Cons of a Balance Transfer
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.
Pros & Cons of a Balance Transfer
- It can help you tackle high-interest debt. If you have a card with a high interest rate, a balance transfer card can help you repay the principal without interest for a short time.
- It can consolidate debts from multiple credit cards, which means you only have to worry about one due date and interest rate.
- It may give you better perks. Some providers offer enticing features and benefits, such as cash back or rewards.
- It involves costly balance transfer fees. Transferring your balance is not free, and fees can add up depending on how much you’re transferring.
- It does not have a 0% APR forever, so you’ll want to take advantage of the introductory APR as much as possible.
- It could hurt your credit score, as it may affect your credit utilization ratio if you close your old accounts and your new one has a lower limit.
What Is a Personal Loan?
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.
Features of a Personal Loan
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.
To get a personal loan, lenders mainly look at your credit score, debt-to-income (DTI) ratio, income and desired loan amount. This influences your interest rate, terms and how much you can borrow. However, some online lenders may also look at factors other than your credit score.
The interest rate is how much you will pay to borrow funds. It is usually expressed in percentage form and applied to the amount due monthly. At the end of 2022, the average interest rate for a personal loan was 11.23%, but this can change based on your credit score and other factors.
Personal loans are paid in monthly installments over the lifetime of the loan, which can be anywhere from a few months to a few years. It is possible to repay a personal loan before the term is over, but some lenders may charge a prepayment penalty.
Pros & Cons of a Personal Loan
While this type of loan can be quite useful, it is essential to understand the pros and cons of personal loans before applying.
Pros & Cons of a Personal Loan
- It allows you to make big-ticket purchases now that can be repaid over time.
- It offers higher borrowing limits compared to credit cards.
- It does not require collateral, depending on the lender.
- It can help you build your credit history if appropriately managed.
- It may offer faster access to cash, as some lenders have quick approval and disbursement periods.
- It may require collateral, especially if you do not have a favorable financial history.
- It increases your debt over time, which can make debt repayment challenging if not managed correctly.
- It may require a higher monthly payment compared to credit cards.
- It comes with a fixed payment schedule, which means you must be able to repay the loan on time if you do not want any consequences to reflect on your credit.
- It may affect your credit negatively if you fail to repay your loan on time.
Which Is Better: Balance Transfer or Personal Loan?
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.
FAQs About Balance Transfers and Personal Loans
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.
- Federal Reserve. "Consumer Credit - G.19." Accessed January 23, 2023.
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