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Balance Transfer vs. Personal Loan: Which Should I Choose?

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Matt Frankel, CFP®
Author: Matt Frankel, CFP®
Matt Frankel, CFP®
Matt Frankel, CFP®
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Matt is a Certified Financial Planner™ and investment advisor based in Columbia, South Carolina. He writes personal finance and investment advice for Motley Fool Money and its parent company The Motley Fool, with more than 4,500 published articles and a 2017 SABEW Best in Business award. Matt writes a weekly investment column for the Motley Fool ("Ask a Fool") that is syndicated in USA Today, and his work with Motley Fool Money has also been syndicated to MSN and Yahoo! Finance. He has been regularly featured on Fox Business and many other major outlets. He’s a graduate of the University of South Carolina and Nova Southeastern University, and holds a graduate certificate in financial planning from Florida State University.

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Fact Checked: Ashley Maready
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When it comes to consolidating debt and lowering your interest expense, credit card balance transfers and personal loans can be two excellent and similar options.

However, like most financial products, both balance transfers and personal loans have pros and cons to consider. For example, while balance transfers may have a 0% intro APR, they often come with a fee and have relatively short promotional periods.

With that in mind, here's a guide to help you decide which is the best choice to help you take control of your debt.

Personal loans for debt consolidation

It used to be rather difficult to obtain a personal loan, especially if you didn't want to pledge collateral. That's changed in recent years, as many online lenders and traditional banks have rapidly expanded into the unsecured personal loan market.

In most cases, you can check your ability to obtain a personal loan without initiating a hard credit inquiry, meaning that it won't affect your credit score to see if you qualify and what your interest rate might be. You can find personal loans in amounts ranging from $1,000 to $100,000 from a variety of lenders.

TIP

How to find the best lenders

When you're looking for a personal loan, focus on lenders offering low interest rates and fees. These hidden costs can eat into your budget if you're not careful! For a list of our experts' favorite lenders, check out our best personal loan lenders page.

Reasons to use a personal loan

There are many situations when using a personal loan to borrow money may be ideal, such as:

  • Personal loans can be great for consolidating high balances, or many different balances. Personal loans are available in amounts of up to $100,000 as of this writing. Not all lenders offer personal loans this large, but most offer maximum loans of at least $25,000.
  • Personal loans for debt consolidation force you to commit to a repayment schedule. If you obtain a 48-month personal loan, for example, you are required to repay the debt in full within that time frame or refinance it into another type of loan. Meanwhile, when you transfer a balance to a credit card, you'll only be required to make a small minimum payment each month.
  • You can use personal loan proceeds for more than just transferring or consolidating credit card debt. For example, if you want to finance a kitchen remodel or pay medical bills, you can do these things with a personal loan and bypass credit cards entirely.
  • Personal loans usually have longer repayment periods than balance transfer credit cards. Unlike a 0% intro APR offer from a balance transfer credit card, which will typically last for 18 months or less, you can find personal loans with terms of 84 months (seven years) or potentially even longer.
  • Personal loans can improve your credit score. All other things being equal, installment loans count more favorably in the FICO credit scoring formula than credit card debt.
  • You can generally get pre-approved for a personal loan without affecting your credit score.

Drawbacks to using a personal loan

But personal loans are not a good option for every circumstance. Here are some of the drawbacks of personal loans:

  • You'll always pay interest with a personal loan. While 0% intro APR balance transfer offers are common, personal loans always charge interest. In fact, only top-credit borrowers typically qualify for personal loans with interest rates below 10%.
  • You usually need a high credit score for a personal loan. In fact, the best APR an average-credit borrower (about 700 FICO® Score) is offered on a personal loan is typically above 17%.
  • While a personal loan forces you to commit to a repayment timetable, it also requires you to commit to a monthly payment that is likely to be higher than the minimum payment on a balance transfer credit card. In other words, if you want the flexibility to choose how much you pay each month, and the ability to pay less when your money is tight, a personal loan may not be the best choice.
  • Not all personal lenders charge fees, but many do. And personal loan origination fees can be rather steep, especially if your credit isn't stellar.

When might a personal loan be a better choice for you?

A personal loan is likely the best choice for borrowers who aren't certain of their ability to pay off their debt within a year, or who may be tempted to simply make the minimum payments on a balance transfer credit card. Personal loans can also be excellent ways to get a quick boost to your credit score, as it's a more favorable form of debt than credit cards in the eyes of the FICO scoring formula.

And finally, personal loans can be the best choice if you have more than just credit card debt to consolidate or pay off. For example, if you have:

  • $8,000 in credit card debt
  • $7,000 in medical bills
  • $10,000 in costs for new appliances for your kitchen

You can obtain a $25,000 personal loan to take care of all of these things at once, as loans in this amount are offered by virtually every personal lender on our radar. It might be tough for the average person to find a balance transfer credit card with a $25,000 limit.

Compare the best personal loans

Get the best rates and terms to fit your needs. Here are a few loans we'd like to highlight, including our award winners.

Lender APR Range Loan Amount Min. Credit Score Next Steps
Fixed: 8.99%-29.99% APR (with all discounts)
$5,000 - $100,000
680
7.99% - 24.99%
$2,500 - $40,000
660
7.80% - 35.99%
$1,000 - $50,000
300

Credit card balance transfers

Transferring a balance to another credit card can be a quick and easy way to pay off debt, as the process generally involves filling out a credit card application and some information about your existing credit card accounts. There are some excellent 0% intro APR balance transfer offers on the market right now, and you can read our updated list of the best balance transfer credit card offers to see what's currently available.

Reasons to use a balance transfer

Like personal loans, there may be certain circumstances that make a balance transfer an ideal fit:

  • You can typically find credit card balance transfer offers with a 0% introductory APR (annual percentage rate). Meanwhile, even the best personal loans typically have interest rates in the 7%-10% range.
  • Many credit cards with 0% intro APR balance transfer offers also have nice rewards programs, as well as 0% intro APR offers on new purchases.

Drawbacks to using a balance transfer

Also like personal loans, balance transfers do come with their own set of drawbacks:

  • Balance transfers often come with a fee. The industry standard has been 3%, but fees of as much as 5% of the amount transferred have become common, especially as interest rates have risen (the banks need to make money somehow!)
  • If you have lots of debt to consolidate, your balance transfer will be limited to the card's credit limit.
  • Balance transfer credit cards typically only require a small minimum payment each month, making it possible for you to leave a substantial balance when the 0% intro APR period expires, at which point the card's standard APR will take over
  • The 0% intro APR period is relatively short compared with the duration available for personal loans. Even the best balance transfer credit cards have 0% intro APR periods for 18-21 months, while you can obtain a personal loan with a term of as long as 84 months.

When might a balance transfer be best?

It makes the most sense to take advantage of a balance transfer offer if your debt is relatively small and you're confident that you can pay it off in its entirety before the 0% intro APR period ends. Sure, you can theoretically obtain another balance transfer at that point, but it's not a smart idea to count on it.

Plus, balance transfers can be great if you want the flexibility to make new purchases, as many credit cards with balance transfer offers also have excellent 0% intro APR periods for new purchases.

We have a free balance transfer calculator to aid you in your decision.

You could always use a combination of the two

It's certainly possible to use both methods of debt consolidation to your advantage. For example, let's say that you have $20,000 in high-interest credit card debt, but you know that there's no way you can pay it off during a 0% intro APR window with a balance transfer credit card.

You could choose to transfer a manageable amount of the debt onto a balance transfer credit card with a 0% intro APR, and then obtain a personal loan for the rest. This way, you're avoiding interest on as much of your debt as possible, but without the risk of a high credit card interest rate kicking in on the rest before you can pay it off.

The point is that while both methods have pros and cons, you don't necessarily have to choose one or the other. The best solution to your debt management could be some combination of the two.

Still have questions?

Here are some other questions we've answered:

Motley Fool Money's best personal loans

Looking for a personal loan but don’t know where to start? Our favorites offer quick approval and rock-bottom interest rates. Check out our list to find the best loan for you.

Best personal loans

FAQs

  • Balance transfers aren't necessarily bad for your credit when used correctly. A balance transfer can help you pay off your debt quicker, which can help increase your credit score over time. However, a balance transfer could potentially harm your credit score initially, especially if your balance transfer results in the credit card being nearly maxed out.

  • Personal loans can be a good option for transferring credit card balances, especially if you need a longer time horizon to pay it back than the card's 0% intro APR period.