Balance transfer vs. personal loan: Which option is best for you?

Choosing between a balance transfer or personal loan

As a general rule of thumb, balance transfer credit cards work best for smaller debts. This is because you can pay off the higher-interest debt, relatively quickly — practically as soon as you apply and are approved for the lower-interest card. On the other hand, if your debt is larger, taking the time to apply for a personal loan may be a better option.

That said, every person's situation is different, so it's important to review these five key factors before you choose either a loan or a balance transfer to help you consolidate and pay off your debt.

#1. What are the interest rates?

When trying to decide between a balance transfer vs. personal loan, the first thing you should do is compare the interest rates of both. The goal is to get the lowest rate possible.

In most circumstances, a personal loan will charge a lower interest rate than even a low-interest credit card. For this reason, a personal loan is a great option if you are willing to go through the application process, wait for an approval and for funding to be deposited into an account.

#2. How quickly can you pay off your debt?

One of the main differences between a balance transfer card and a personal loan is that the super-low interest rates associated with a balance transfer credit card might be offered for a limited time only.

These promo periods typically range from a few months to as long as a year. For this reason, balance transfer cards work best for lower debt balances that you can pay off quickly. But before you choose a balance transfer card, be sure to read the fine print.

Sometimes the interest rate will jump dramatically after the promotional period — with some card interest rates rising to 20% or more at the end of the promotional period.

How does this impact how quickly you can pay off your debt? The longer you take to pay down high-interest debt, the more money you spend paying interest and the longer it takes you to become debt-free.

So, if your debt is relatively small — say a few thousand — and you can pay this off relatively quickly, then choosing a balance transfer card with a low-interest promotion is a great option. It gives you a low-interest loan, which frees up money that can be used to pay down the debt faster.

If you owe more than $5,000 or it will take you a few years to pay off your debt, a personal loan might be bettert. With a personal loan, the interest rate is usually fixed for the duration of the loan (known as the term). However, because you will be required to repay this personal loan over a longer period of time, it’s important to shop competitively. The key is to find a loan with terms that work for you at the lowest possible interest rate.

#3. How much flexibility do you need?

Some people like to know exactly how much they need to pay each month, while others prefer flexibility — paying more one month and less the next.

With a personal loan, your monthly payments are fixed. Miss a payment or neglect to make a full payment and you could run the risk of defaulting on the loan — and this could result in additional fees, hurt your credit score, or worse.

With a balance transfer card, you can pay as much or as little of the balance owed — all on your own schedule. Keep in mind, you must make the minimum payment each month but that usually translates to a dollar or two on every hundred you owe. Plus, with a balance transfer card, there are typically no penalties or fees for paying your debt off early.

As a result, using a balance transfer credit card to help pay off debt puts much less pressure on your budget than a set-in-stone payment schedule.

#4. Are there any fees to transfer the balance?

If you opt to use a personal loan, there’s only a slim chance you’ll need to pay extra fees — such as legal or appraisal costs, depending on the type of personal loan and what the lender requires.

On the flipside, a balance transfer credit card might boast an alluring 0% interest rate, but that doesn’t mean you won’t pay fees. Most balance transfer cards charge a fee to move a debt from one card to another. These fees range from 0.5% to 3% or more. This means if you were to transfer a $4,000 debt to a balance transfer credit card with a 3% balance transfer fee, your first statement would show a charge of $120 — the cost to use the lower-interest card to carry your debt. Don’t forget to look out for annual fees on the credit card, too.

These can range starting from $20 to $150. While these fees are relatively small, they add up, ultimately hindering your goal of becoming debt-free.

#5. Will you find yourself in debt again?

If you’re prone to making unnecessary purchases on credit cards, a personal loan is probably a better option than a balance transfer card.

Even with a low-interest rate, most credit cards charge more interest than personal loans. Plus, opening another credit card gives you access to more credit and a greater chance of getting into debt, again. Keep in mind, many balance transfer cards charge a completely different — often higher— interest rate for purchases compared to the low-interest rate reserved for balance transfers from other cards.

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Pros and cons of balance transfer credit cards

Pros

• Can reduce the interest rate of your debt
• Potential to pay off debt faster
• You have the flexibility to pay off your debts without a set term or payment plan

Cons

• Extra fees (including balance transfer, annual fee, among others)
• Promotional offers are short-term
• Run the risk of accumulating more debt

Pros and cons of personal loans

Pros

• Ability to borrow larger amounts and consolidate debt
• Potential to pay off debt faster
• Can reduce the interest rate of your debt

Cons

• Fixed-term loans limit repayment flexibility
• Extra fees, such as loan origination fee, discharge fees, appraisal fees, among others
• Must adhere to a set payment plan

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Deciding what’s best for you

When deciding between a balance transfer vs a personal loan, it’s a good idea to weigh the pros and cons of each. Always shop around, and make sure you consider both the debt you want to consolidate, your shopping habits and money management skills.