Three ways to consolidate and pay off debt are a balance transfer credit card, a personal loan, or a combination of the two. Which option is best depends on the type and amount of debt you have and your ability to pay off that debt over time.
For instance, a balance transfer credit card might be a smart choice if you have good credit and debt across a few credit cards. On the other hand, a personal loan might be better if you have multiple types of debts (credit cards plus other types of loans) and need more time to pay off your debt.
Read on to learn more about the choice between a balance transfer or personal loan, including the pros and cons of each option and how to leverage the benefits of both.
Key Points
• Balance transfer cards and personal loans are both ways to pay down debt, and you can use both simultaneously.
• Balance transfer cards can allow you to pay down debt with no or low interest for a period of 12 to 18 months.
• Personal loans can allow you to consolidate debt into a single, more convenient loan, often at more favorable rates.
• Each option has its advantages and disadvantages, so research is recommended.
• For some people, a combination of a balance transfer card and a personal loan will be the best way to deal with their debt.
What Is a Personal Loan?
A personal loan is a lump sum borrowed from traditional banks, credit unions, or online lenders that you agree to pay back over time, usually with interest. The borrower will make regular payments, usually on a monthly basis, to the lender over a fixed period of time until the loan is repaid.
Unlike many other types of loans, personal loans can be used for just about anything. Often, these loans are used to resolve short-term cash flow problems, cover unexpected expenses during an emergency, or pay for large expenses.
Personal loans for debt consolidation involve a borrower taking out a personal loan and using it to pay off balances on high-interest credit cards and other debts. Because personal loans typically have lower interest rates than credit cards, the borrower can potentially save money while paying off their debt.
Though there are different types of personal loans, they’re most often unsecured loans. This means they’re not backed by collateral like, say, your mortgage is backed by your house. As such, the lender will usually assess your creditworthiness and financial situation when determining whether to approve you for the loan.
Recommended: Check Your Personal Loan Rate
What Is a Balance Transfer Credit Card?
A balance transfer credit card is a credit card that allows you to transfer balances from other accounts. Let’s say an individual has outstanding balances on three or four high-interest credit cards. They could transfer that debt to a balance transfer credit card that charges a lower or even 0% annual percentage rate (APR).
If a lower rate is offered, it will usually last for a limited period of time — 12 to 18 months is the norm. Should that person pay off their debt within that window, they could save money on interest and have all of their payments go directly toward paying down the principal. After the promotional period ends, however, the interest rate could be quite high, usually higher than the interest rate on a personal loan.
Balance Transfer vs Personal Loan for Debt Consolidation
When deciding on either a balance transfer credit card or personal loan for debt consolidation, consider the type of debt you have and your capacity for monthly payments.
A balance transfer credit card might be the right choice if you’re confident you can pay off your debt within the APR introductory period. However, a personal loan might be the better choice if you find it difficult to resist spending on a credit card, or if you have debt that needs to be paid off over a longer period of time. Personal loans are also preferable if you want a fixed interest rate and would like to know ahead of time how much your monthly payment will be, as it’s going to be the same each month.
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Balance Transfer Credit Card vs. Personal Loan |
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|---|---|---|
| Balance Transfer Credit Card | Personal Loan | |
| Types of Debt You Can Consolidate |
• Generally best for credit card debt |
• Good for multiple types of debt |
| Interest Rates |
• Can offer a lower intro APR, after which the rate will likely be higher than a personal loan • Generally a variable rate |
• Tend to have lower rates compared to credit cards • Typically a fixed rate |
| Fees |
• One-time balance transfer fee that’s usually 3% to 5% of the amount transferred |
• One-time origination fee ranging from 0% to 8% of the loan amount |
| Terms |
• Promo APR offers generally limited to 18-21 months |
• Can have terms up to 84 months or longer |
| Repayment |
• Only have to make the minimum required payment |
• Fixed payments over a set period of time, with a predetermined payoff date |
| Credit Score Requirements |
• Generally need at least good credit (670+) to qualify |
• Best rates and terms reserved for those with good credit |
| Credit Score Impacts |
• Might increase credit utilization, which can negatively affect credit |
• Might lower your credit utilization, which can help credit |
Pros and Cons of Personal Loans
Both balance transfer credit cards and personal loans can be good options depending on the amount and type of debt you have. Personal loans generally offer lower APRs, which can be helpful if you have a variety of types of debt that may take some time to pay off. Personal loan terms vary, but it’s possible to borrow up to $100,000 and pay off the balance over several years.
However, your interest rate will also depend on your credit score — a low score can mean a high interest rate. It’s smart to compare a few personal loan rates to find the best offers.
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Pros and Cons of Personal Loans for Debt Consolidation |
||
|---|---|---|
| Pros | Cons | |
| Loans can be large enough to consolidate many types of debt. | The interest rate may be high if you have bad credit. | |
| Those with good credit can secure low APRs. | It could be a few years before your debt is fully paid off. | |
| Budgeting is easier with fixed interest rates and monthly payments. | There’s less flexibility in your monthly payments, as they’re fixed. | |
| You have the option to choose from different loan terms. | An origination fee may apply, which could be up to 8% of the loan amount. | |
Pros and Cons of Balance Transfer Credit Cards
If you only have debt on a few credit cards, a balance transfer credit card might allow you to save on interest while you pay it down. These cards can offer lower or even 0% APRs for a certain period of time, usually for 12 to 18 months. This gives you time to pay off the total balance transferred from other cards.
However, suppose you do not pay off the balance within that window. In that case, the interest rate could rise above the rate you were initially paying before you consolidated the amounts to your balance transfer credit card.
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Pros and Cons of A Balance Transfer Credit Card for Debt Consolidation |
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|---|---|---|
| Pros | Cons | |
| You can get a low or 0% APR for an initial period, thus saving on interest. | You need a good to excellent credit score to qualify. | |
| Once your debt is paid off, you have an additional open credit line, which may boost your credit score. | You may not be able to transfer the full amount of your debt to the card. | |
| Some balance transfer credit cards offer rewards, points, or other perks. | There may be a balance transfer fee, which generally is 3-5% of the balance transferred. | |
| You’ll have the flexibility to pay off as much as you’d like each month with no fixed payment schedule. | If you don’t pay off your debt during the promo period, the interest rate may become higher than that of your initial debt. | |
Using A Balance Transfer Credit Card and a Personal Loan
A third option for debt consolidation is to use both a personal loan and a balance transfer credit card. You could use a balance transfer credit card to pay off as much high-interest credit card debt as you can at a low APR. Then, you’d take out a personal loan to pay off the rest of your debt at a lower interest rate than what you’re currently paying.
To figure out how much of a personal loan to take out in this scenario, add up your total debt. Next, calculate how much you would have to pay each month in order to pay off your debt in full by the end of the promotional APR.
For example, if you had $4,000 in credit card debt and a 0% APR that lasted for 18 months, you’d have to pay about $222 each month. If you weren’t able to pay that much, you could consider applying for a personal loan to pay off the remaining amount.
The Takeaway
Three ways to proactively consolidate and pay off debt are to use a balance transfer credit card, a personal loan, or a combination of the two. In general, a balance transfer credit card is best for those with good credit and primarily credit card debt. Those with various types of debts and who need a structured debt payment plan may prefer a personal loan. A combination of both can suit a variety of situations.
Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.
FAQ
What is a balance transfer loan?
A balance transfer is a credit card transaction whereby debt is moved from one account to another. These cards often offer a 0% introductory APR for 12 to 18 months, which means any balances moved to the card could potentially be paid off interest-free. The downsides are that there is often a balance transfer fee, and there may be a limit to the total amount you can transfer to the new card.
Does a balance transfer hurt your credit?
It depends. Opening a new credit card and transferring all your other credit card balances to it could push your credit utilization ratio to its limit, which would hurt your credit score. Your score is also negatively affected from the hard inquiry that results from applying for a new card. However, if you use a balance transfer credit card wisely and pay off all of your higher-interest cards, that will lower your credit utilization ratio and build your score.
Is there a difference between a loan and a balance transfer?
Both a loan and a balance transfer are ways to consolidate debt, but they are not the same thing. A debt consolidation loan is where you take out a loan to pay off your existing debt, while a balance transfer allows you to move your existing debt onto one credit card. Each option has unique pros and cons.
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