Whether a balance transfer vs personal loan is better for you depends on your situation.
Though it’s an important part of getting the message out to the public, many debt consolidation and personal loan companies often cause confusion with their marketing language. It can be easy to mix up the differences between the two financial tools. While balance transfers and personal loans are not exactly get-out-of-debt-free cards, they can help borrowers make payments on time and potentially avoid future hassles.
Because both options involve opening a new installment loan or credit account, they aren’t ideal solutions for every borrower, nor do they automatically represent the easiest path when dealing with debt. If you’re considering either option, it’s important to remember that being approved for one or the other doesn’t mean you’re out of debt or that you can relax on your payments. That said, both can provide a more comfortable path toward paying off or paying down high-interest loans and credit card debt without defaulting on the minimum payment amounts alone.
Balance Transfer Credit Card
Pros and Cons
Pros
- You can consolidate your high-interest credit card debt up to the card’s limit
- You may be able to pay down debts more quickly
- You may save money on interest with balance transfer offers
Cons
- You’ll likely face balance transfer fees
- You can end up being in more debt than what you started with
- Some cards require good credit scores to qualify
Before you get too excited about a balance transfer credit card, it’s important to remember that you’ll still be applying for another credit card. At the same time, a decent balance transfer credit card can help you consolidate all of the smaller debts you have, making it easier to make minimum monthly payments and, eventually, pay down your debt. That said, all of the challenges that apply to “normal” credit cards apply to balance transfer cards. You’ll need a satisfactory credit score and have all of your other financial ducks in a row before you start looking for the right card.
What Is a Balance Transfer Credit Card?
Most credit card companies advertise their products as normal everyday cards, but many also allow balance transfers. That term refers to the process of using the available credit on one card to pay off your debt owed on another and, in some cases, consolidate multiple credit card balances. However, they’re not golden tickets. Balance transfer credit cards often have interest rates that are similar to or higher than traditional cards, so it’s a good idea to make sure you know what you’re getting into before signing up for one.
How Does a Balance Transfer Credit Card Work?
The process of applying for a balance transfer credit card is identical to applying for any other credit card. You’ll need to have a satisfactory credit score and a decent relationship with your finances to be approved. Once you’ve jumped through the hoops, transferring a balance from one card to your balance transfer card doesn’t get rid of your debt, as the goal of a balance transfer card is to consolidate smaller credit debts in one place and (hopefully) lower the interest rate. You’ll still have to make monthly payments and will likely pay transfer fees or other charges to get started.
Balance Transfer Credit Cards Features and Benefits
While they can be very helpful in paying off your debts faster, balance transfer cards do have some disadvantages, and some require particularly good credit scores to qualify.
- Some cards offer promotional balance transfer rates, including zero-interest offers
- Balance transfers can help pay down debt much faster
- Interest rate savings can add up quickly
- Balance transfer fees can reach up to 5% of the amount transferred
- Promotional rates don’t last forever
- Some cards have restrictive credit score requirements and other hoops to jump through
- You can generally only use the cards to consolidate other credit card debt
Personal Loan for Debt Consolidation
Pros and Cons
Pros
- You can consolidate almost any type of unsecured debt
- Paying off the loan on time can help build credit
- Most loans have much lower interest rates than credit cards
Cons
- Some of the lowest rates require strong credit scores
- Loans don’t get rid of debt
- You may have to pay origination fees and other charges
Personal loans for debt consolidation offer more flexibility, as they can be used to consolidate almost any type of unsecured debt. That said, loans still mean debt, so you’ll need to be aware of potential “gotchas.”
While it might sound counterintuitive to use one type of debt to pay another, debt consolidation loans offer a legitimate path to paying down loans, credit cards, and other types of debt through a series of fixed monthly payments. They allow the borrower to make one monthly payment, which is often much lower than the combined total of the smaller payments made each month, and paying them on time can bolster the borrower’s credit score.
Related Article: Can I Use a Home Equity Loan to Pay Off Debt?
What Is a Personal Loan for Debt Consolidation?
Personal loans for debt consolidation are just another name for personal loans that the borrower uses to consolidate smaller debts. They require an application and credit check, and the borrower may be required to pay origination fees and other charges related to the loan application process. The maximum loan amounts depend on the lender’s policies and the borrower’s credit history, which means that some borrowers may not qualify for a loan amount that covers the amount of debt they need to consolidate.
How Does a Personal Loan for Debt Consolidation Work?
Personal loans for debt consolidation work almost exactly the same as other personal loans, but the funds received are used to pay off other debts rather than make a purchase or other spending action. The borrower applies and undergoes a credit history check. If approved, the funds are either deposited into the borrower’s account or transferred directly to the debt accounts involved in the consolidation plan.
Personal Loan to Pay for Debt Consolidation Features and Benefits
Personal loans can help quickly consolidate debts and can lower payments and interest rates, but it’s essential to understand all of the terms and conditions.
- Personal loans can consolidate more than just credit card debts
- The borrower can spread payments over a longer period of time
- Loans generally have much lower interest rates than credit cards
Related Article: Personal Loan vs Personal Line of Credit: Which One’s Right for You?
Balance Transfer Vs Personal Loan: Which is Better?
Balance transfer cards can have some advantages over personal loans, but whether they are “better” or not completely depends on your situation. If you need to consolidate credit card debts and believe you have the ability to pay off the card within any available promotional time period, you could save a significant amount on interest. Be aware, however, that credit cards tend to have much higher interest rates, and some have steep annual fees that could negate any savings. Many consumers use a budgeting app to help manage their payment schedules after securing a balance transfer card or personal loan for debt consolidation.
