Using a Balance Transfer vs. Personal Loan to Pay Debt

balance transfer vs personal loan

The consumer finance sector is highly competitive, and consumers often have many options to transfer and repay debt. For example, credit card companies frequently entice new customers with attractive promotional balance transfer offers, while personal loans offer cost and payment certainty at aggressive rates. If you’re trying to decide between a balance transfer vs. a personal loan, it’s important to note the pros and cons of both options.

What is a Credit Card Balance Transfer?

A balance transfer is a type of credit card transaction that lets you move debt from one account to another. This can be useful for two reasons:

  • If you have a lower rate on one card, transferring your balance to that card can save you substantial amounts of money on monthly interest charges, allowing you to pay down your principal faster or ease a strained budget. 
  • If you have several outstanding credit cards, transferring each balance to a single card with a higher credit limit can reduce the number of payments you have to make each month — and make it easier to track your financial situation. 

Credit card companies frequently offer promotional balance transfer interest rates to encourage customers to switch their balances. These offers generally last from 6–18 months with introductory rates as low as 0-5%, after which the standard rate for the new card goes into effect. While many cards have balance transfer fees, these are often waived during the promotional period. 

Is a Balance Transfer a Good Idea? 

When interest rates are high, promotional balance transfer rates provide an excellent opportunity for cardholders to gain financial relief and escape a debt spiral. As such, they are excellent options for cardholders disciplined enough to make the largest payments they can to knock down principal quickly while interest rates are in the promotional period.

Low balance transfer rates are an attention-getter, but to gain the maximum benefit from these programs, cardholders must have the discipline to work toward paying off the balance and know the terms of their card agreement.

Minimum Payments

Minimum payments are often based on the interest that accrues during each period. If you only make the minimum payment, you’ll get nowhere quick. Most experts recommend continuing to make payments at least as large as you were making before the transfer, and if possible, increase your payments to knock the balance down before your interest rate rises to the standard rate for your card. 

Promotional Vs. Regular Interest Rate

In some cases, failing to pay the balance off in full incurs interest charges on the total amount at the end of the promotional period. Even without this clause, you’ll still have to pay the regular rate on your new card for whatever balance remains at the end of the promotional period. 

Purchases And Balance Transfers

With many cards, the balance transfer must be fully paid before payments are allocated to new purchases. Some cards offer 0% introductory promo rates for purchases as well as balance transfers. Still,many don’t, which means you’ll pay interest on your purchases until you completely pay off the balance you transferred.

Consider using a second card for purchases, then paying it off in full every month and using your balance transfer card to pay down your debt. 

Personal Loans

Personal loans have become a much more popular option. While they used to be difficult to access without excellent credit or significant collateral, the rise of peer-to-peer loan networks like Prosper and online finance companies has led to a surge in unsecured personal loan options

A personal loan is typically more straightforward than balance transfer offers. You apply for the loan, and once you’re approved, you can use it to pay off your card balances. You have a set repayment schedule, and at the end of that period, you’ve completely paid off the loan! 

Is Getting a Personal Loan a Good Idea?

Personal loans are a strong option in certain scenarios. The fixed interest rate, set repayment schedule, and long repayment period carry advantages for many consumers. 

Balance transfer promotions are a fantastic opportunity to pay down debt, but you must commit to paying significantly more than the minimum payment each month to be successful. 

Unlike promotional balance transfer rates, personal loans feature a fixed rate that doesn’t expire after the initial period. Unless you’re sure you can pay off the balance before the end of the promotional period, the overall cost of a personal loan may be lower than that of a credit card balance transfer. 

Personal loans can often improve your credit score. In most cases, personal loan debt has a more favorable impact on your credit score than credit card debt. Unlike credit cards, you can also get pre-approved for most personal loans without a ‘hard’ inquiry. A soft inquiry doesn’t count against your credit. 

In addition, personal loans can be a better option if you have several types of debt you’d like to consolidate or even combine with another project. Let’s say you have the following outstanding debt and upcoming expenses: 

  • $6,000 in credit card debt
  • $8,000 in medical debt
  • $4,000 for a new deck for your home
  • $7,000 in college tuition and costs for your child. 

With a $25,000 loan, you could wrap all of these into one monthly payment!

Which One Fits You? 

When it comes to a balance transfer vs personal loan, both options have their pros and cons. Which one is best for you? That depends on your situation. 

A balance transfer is best when:

  • You have the disposable income (and willpower) to pay off all, or at least most, of your debt within the promotional period. 
  • Your credit score is high enough to qualify for top promotional balance transfer offers and a low interest rate after the promotional period ends.
  • You’re carrying a minimal amount of debt that can easily be paid off during the promotional period. 

A personal loan is best when: 

  • You have a large amount of debt and don’t have the income to pay off that debt (or a significant portion of it) during the promotional period of a balance transfer offer. 
  • You prefer a set payment structure over a set period, for ease of budgeting and/or to eliminate the temptation of only making the minimum payment.
  • You’d like to consolidate multiple smaller debts and/or upcoming expenses into a single loan.
  • You have average to below-average credit and would like to improve your credit score.

The Right Choice For You

There’s no uniform right answer, but a careful evaluation of your own situation and weighing out the pros and cons of a balance transfer vs. personal loan will help you find the right answer for you. Good luck!

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All personal loans made by WebBank

1  For example, a three-year $10,000 personal loan would have an interest rate of 11.74% and a 5.00% origination fee for an annual percentage rate (APR) of 15.34% APR. You would receive $9,500 and make 36 scheduled monthly payments of $330.90. A five-year $10,000 personal loan would have an interest rate of 11.99% and a 5.00% origination fee with a 14.27% APR. You would receive $9,500 and make 60 scheduled monthly payments of $222.39. Origination fees vary between 1% and 5%. Personal loan APRs through Prosper range from 6.99% to 35.99%, with the lowest rates for the most creditworthy borrowers. 

Eligibility for personal loans up to $50,000 depends on the information provided by the applicant in the application form. Eligibility for personal loans is not guaranteed, and requires that a sufficient number of investors commit funds to your account and that you meet credit and other conditions. Refer to Borrower Registration Agreement for details and all terms and conditions. All personal loans made by WebBank.


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