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Debt Consolidation Loan Vs. Balance Transfer Credit Card – Forbes Advisor

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If you are looking to consolidate your debts, you may consider using a balance transfer credit card or a personal loan (aka debt consolidation loan). Both options can simplify debt repayment while potentially lowering your interest rate.

Learn about the differences between a balance transfer and a personal loan to decide which debt consolidation approach is right for you.

Balance Transfer vs Personal Loan: What’s the Difference?

A balance transfer involves transferring the balance of one or more credit cards to a new credit card, usually one with a 0% APR promotional period that spans 12-21 months. As long as you pay your balance before the end of this promotional period, you will not owe any interest. If you have a balance at the end, however, you could face high interest charges.

A personal loan, on the other hand, is usually an unsecured loan that you repay in monthly installments. You can use the funds to pay off your existing debts or a lender could pay off your creditors for you. Then you’ll make fixed monthly payments on your loan over a set period of time, usually between one and seven years. Depending on your credit, you may qualify for a competitive rate.

Advantages and Disadvantages of Balance Transfers and Personal Loans

Balance transfers and personal loans have advantages and disadvantages. A personal loan can often offer higher loan amounts and a longer repayment term than a balance transfer, for example. However, you will have to pay interest on a personal loan, whereas some balance transfer credit cards waive interest charges for a year or more.

Benefits of a personal loan

  • You can use a personal loan to consolidate several types of debt, such as credit card balances, medical bills, or other personal loans.
  • Some lenders will repay your creditors directly, which will simplify the debt consolidation process.
  • You might be able to borrow up to $100,000 and get seven years to pay it back.
  • Fixed interest rates and monthly payments make it easy to budget and work towards a specific repayment date.

Disadvantages of a personal loan

  • You can’t get a competitive rate if you don’t have strong credit.
  • Some lenders charge origination fees.
  • You’ll pay interest up front, unlike a balance transfer credit card with a 0% promotional period.

Advantages of a credit card with balance transfer

  • You could qualify for 0% APR for up to 21 months, depending on the card, which can save you money on interest.
  • Without interest, you may be able to pay off your debt faster.
  • Some cards don’t charge an annual fee and offer rewards, such as travel points or cash back.

Disadvantages of a credit card with balance transfer

  • The 0% APR period won’t last forever, so you could face high interest charges if you still have a balance at the end.
  • Some cards charge a balance transfer fee of 3% to 5% of the amount you transfer.
  • You may need excellent credit to qualify, and the transfer limit you get may be lower than what you owe.

Find the best balance transfer credit cards of 2022

5 questions to ask when choosing a balance transfer or personal loan

Choosing a debt consolidation strategy is not always easy. Ask yourself these five questions to help you understand which option is best for you.

1. What are the interest rates and fees?

When deciding between a personal loan and a balance transfer, consider which option would save you the most interest and fees. A balance transfer may be the cheapest option if you can pay off your balance in full before the end of the 0% APR introductory period.

Be sure to read the fine print, though, as your interest rate could skyrocket to 16% or more when the promotion ends. Also, beware of balance transfer fees, as this could factor into your savings.

Some personal lenders charge no fees for taking out a personal loan, while others charge origination fees of up to 8% of your loan amount. If you opt for a personal loan, compare the rates of several lenders to find the best offer.

2. How much and what types of debt do I have?

If you have significant debt, you may prefer a debt consolidation loan to a balance transfer. Balance transfers usually reach a certain percentage of your credit limit, while you can borrow a personal loan up to $100,000.

Additionally, you can use a personal loan to consolidate several types of debt. Balance transfers, on the other hand, are usually reserved for transferring credit card balances. If you want to consolidate a large amount of different types of debt, a personal loan might be the best solution.

3. What is the repayment schedule?

When you take out a personal loan, you usually agree to pay it back in fixed monthly payments over a number of years. Since your payments stay the same month after month, you can budget for them more easily.

With a balance transfer credit card, you can choose how much you pay each month, as long as you make the minimum payment. To fully pay off your balance before the end of the 0% APR period, you may need to use a calculator to determine your monthly payments.

Then it’s up to you to stick to that payment schedule and avoid racking up additional debt. If you start racking up new charges on your credit card, you could find yourself in worse shape than when you started.

4. How will this impact my credit?

Opening a new credit card or loan account can impact your credit in different ways. At first, your credit score might drop a few points when the creditor conducts a thorough investigation to check your credit. As long as you pay off your debts on time, your score should bounce back.

Opening a new credit card can also impact your credit utilization ratio, which is the amount of credit you use compared to the amount you have. To protect your credit score, keep your credit utilization below 30%.

Having a credit mix can also improve your score. Credit cards represent revolving debt, for example, while a personal loan is a type of installment debt. If you don’t have any installment debt, borrowing a personal loan could diversify your credit mix.

However, perhaps the biggest influence on your credit score is how you manage your balance transfer card or personal loan. Making payments on time and paying off your debt can improve your credit.

5. What are the credit requirements?

You’ll likely need a good or excellent credit score to qualify for a balance transfer credit card or personal loan. On the FICO scoring model, a good score starts at 670, a very good score starts at 740, and an exceptional score starts at 800.

Some personal lenders have looser borrowing criteria, allowing you to qualify with a fair credit score (below 670) or a creditworthy co-signer.

You may be able to prequalify online for a personal loan without impacting your credit score. Prequalifying can give you an idea of ​​your loan rates, terms and amounts, but your offer won’t be locked in until you submit a complete application and allow for a firm credit check.


A personal loan and balance transfer can help simplify debt repayment and potentially save money on interest charges. If you have high balances on multiple types of debt, a personal loan could give you the flexibility you need. But if you owe money on a credit card or two that you can pay off in 21 months or less, a balance transfer credit card might offer greater interest savings.

Whichever option you choose, make sure you have read the details of your loan or credit card agreement, including rates and terms. By sticking to your payment schedule and avoiding accumulating additional debt, you can move closer to a debt-free life.

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