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Personal Loan vs Balance Transfer: Which One Is Right For You

A comparison between personal loan and balance transfer, how to decide which is better, and 3 of our favorite Bal
Tom Cecil

December 3, 2021

Personal Loans
Credit Cards - General
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All content is written by editorial staff or writers engaged by the site, not by marketers/sales staff. Editors responsible for producing the content are not in contact or affiliated with any advertiser and are not compensated based on success of the affiliate links. All decisions regarding recommendations are determined separately from advertising relationships. Any opinions, analyses, reviews or recommendations expressed are those of the author's alone, and have not been reviewed, approved or otherwise endorsed by any card issuer.

Curious about the differences between a personal loan and a balance transfer? 

When you’re looking to pay off high interest debt, the choice often comes down to one of those two options. 

A balance transfer card may sound like the best choice since they often include a low or 0% introductory APR on balance transfers for several months.

A personal loan, on the other hand, always includes some form of interest. However, depending on your financial situation, you may qualify for a higher loan amount, making it a better choice. 

So, which is best for you? 

In this article, we’ll see how a personal loan compares to a balance transfer, 6 questions to ask yourself when deciding between the two, and some excellent balance transfer credit cards

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Let’s get started.

Personal Loan Vs Balance Transfer: A Quick Comparison

A personal loan and a balance transfer can make debt repayment easier while minimizing the interest payments you’d owe the credit card company. 

A. Balance transfers

A balance transfer card offering a low intro APR is an attractive option.

 With a balance transfer card, you can take advantage of the introductory-APR offer to pay down your debt. Ideally, you want to clear any outstanding balances before the APR offer expires. Doing so means potentially avoiding interest charges altogether. 

The introductory APR offer is what makes the balance transfer card so valuable. Making the most out of the intro period will allow you to get the most value out of your card. 

B. Personal Loans

If you need to transfer a larger amount or would prefer to borrow over a longer period, a personal loan might be the best option. 

A personal loan is a type of unsecured loan, meaning you don’t need to put up any collateral. Since a personal loan often comes with a fixed interest rate, it might be lower than the standard APR you’d get with a credit card.

Both can be useful for rolling multiple debts into a single monthly payment. 

Before you go ahead and apply for either option, asking yourself the following questions can help ensure you’re making the best decision:

6 Questions To Ask When Deciding Between A Personal Loan And A Balance Transfer

When it’s time to decide between a personal loan vs balance transfer, begin by asking yourself these six questions: 

1. What type of debt do I have?  

You might find a personal loan offers more flexibility if debt consolidation is part of the plan. A debt consolidation loan offers a lump sum that you can use to pay off various types of debt, including a student loan, home equity loan, existing credit card debt, and so on. 

While there will likely be some stipulations about how you can use the money, the lender will either deposit the funds into your bank account for you to pay off your creditors, or the lender will do that for you. 

However, if you primarily have credit card debt, applying for a balance transfer credit card might make more sense. 

This is because, depending on the card issuer, you may only transfer specific kinds of debt, like existing credit card debt. Other issuers may give you balance transfer checks which you can use to pay off various types of debt. 

Before applying for that new credit card, it’s essential to bear in mind that if you’re looking to move debt from an existing credit card to a new one, it generally has to be between different banks or issuers.

2. How much debt do I have? 

A balance transfer credit card will only let you transfer a certain amount of money, governed by your credit limit. What’s more, you probably won’t know what your credit limit will be until after you’ve formally applied. 

By comparison, you might be able to see an estimate of the loan amount you’d qualify for before you apply for the debt consolidation loan. This won’t guarantee your approval or the loan term, but it can give you an idea of what you can expect if you are approved. 

A good idea would be to total your debt and figure out a reasonable monthly payment so you have an idea of how long it’ll take to pay off. Then, check the various financing options to find a lender or credit card company to consolidate that debt. 

Having a good understanding of what you want to pay can help narrow down your choices. 

3. What kind of interest will I pay?

One of the main benefits of a balance transfer card is taking advantage of the introductory balance transfer offer. If you go for this option, be sure to read the fine print. It’s crucial to know when the introductory period ends and what the APR will be after that. 

Personal loans don’t generally offer any promotional interest rates, but they may have a lower interest rate than the standard APR on the balance transfer card. Additionally, many personal loans will include a fixed interest rate. 

However, a credit card balance transfer may be the most cost-effective option if you can pay off your remaining debt before the introductory period expires. Compare the credit card interest rates of multiple cards to find the best available option. 

If you’d prefer to pay off your existing debt over a longer period of time or would like a more structured repayment plan, a personal loan could be better. 

4. What fees are involved? 

Even if a balance transfer credit card offers you a 0% intro APR period, there are still costs involved. You’ll generally need to pay a 3% - 5% balance transfer fee, often with a minimum fee of $5 to $10. 

You can occasionally find a balance transfer card that doesn’t charge this fee, but that’s unlikely. Additionally, the card issuer will likely charge an annual fee for the balance transfer card. 

By comparison, the lender may charge an origination fee when taking a personal loan. This fee usually ranges between 1% to 5% of the total loan amount. Additionally, you may be charged an application fee or a prepayment penalty if you pay off the loan early, but this is uncommon. 

It’s also worth noting that different lenders will charge different rates, so it's worth shopping around. 

5. How will this affect my credit score?

Applying for a balance transfer card or a personal loan will affect your credit score. 

Applying for either of these will result in a hard inquiry, which will lower your credit score by a few points. However, the effect will be minimal and temporary. Your credit score will recover in a few months, provided no additional negatives are applied. 

On the flip side, having a mix of credit types can improve your credit score. 

Credit cards are a type of revolving credit, whereas a personal loan is an installment account. As such, if you don’t have an installment loan, like a student loan or mortgage, in your credit history, a personal loan can diversify your credit profile and potentially improve your credit score. 

Applying for a new credit card or a debt consolidation loan will also affect your credit utilization ratio, an important component in calculating your credit score. Lenders generally look favorably on those who maintain a credit utilization ratio of 30% and below. 

Additionally, it’s essential to remember that you’ll generally need good to excellent credit to qualify for the best balance transfer cards. A lower credit score may also subject you to a higher interest rate and affect the loan term. 

6. Do I have a monthly repayment plan in place?

A personal loan generally has a fixed monthly payment for a set amount of time, whereas credit cards only require a minimum payment. Just making the minimum payment or any purchases on your new card could result in even more debt than when you started. 

When comparing the two options, it’s a good idea to figure out your monthly repayment needed to pay the balance before the introductory APR period ends. 

Then it’s a matter of picking whichever suits your budget. 

3 Excellent Balance Transfer Credit Cards

If you’ve found that a credit card balance transfer is the best way to go, here are a few of the top cards available: 

Final Thoughts 

Both a debt consolidation loan and balance transfer can optimize your existing debt, making debt repayment much more manageable. However, neither is better than the other as your circumstances will play the most significant role in deciding which to go with. 

If credit card debt is your primary source of debt, you may find a balance transfer is the best way to go, provided you can pay off the balance before the introductory APR offer expires. 

However, if a balance transfer doesn’t make sense, a personal loan might be more beneficial. But, before proceeding, make sure you understand the potential fees, how it might affect your credit, and which aligns best with your payment plan. 

If you’re interested in learning more about balance transfer cards that might be best suited for you, check out our list of the top balance transfer cards.

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