Debt consolidation loan vs. balance transfer credit card

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If you’re looking for an inexpensive way to pay down your high-interest credit card debt and your credit score is in good shape, you several have options to consider. Balance transfer credit cards and unsecured personal loans are two of the most popular methods to help you pay down debt and save money along the way.

Either choice will help you consolidate debt and eventually become debt-free, but there are several factors you should consider while weighing a balance transfer versus a personal loan. Before you move forward with your plan, compare both of these options and weigh the pros and cons of each.

Snapshot: Balance transfer credit card vs. personal loan

Balance Transfer Credit Cards
Personal Loans
Best for
Smaller debt that can be paid off completely in a shorter amount of time Larger amounts of debt that may take years to pay off
Repayment terms Pay the balance in full by the end of the introductory period to avoid accruing interest Make fixed payments each month for the entirety of the loan
Approval requirements
Good to excellent credit score required Good credit score preferred, but bad-credit loans are also available
Fees Balance transfer fee: 3 percent to 5 percent of the amounts you transfer Origination fee: 1 percent to 8 percent of the total loan amount

What is a balance transfer credit card?

A balance transfer credit card is a credit card that gives you 0 percent APR on balances you transfer for a limited time. By signing up for a balance transfer credit card, you have the opportunity to pay down your debt without any interest accruing during the introductory offer period, which usually lasts for 12 to 20 months.

Balance transfer credit cards can be helpful financial tools to help you chip away at that looming pile of debt, but they must be used intentionally, since they tend to have higher interest rates than other credit cards. If you fail to pay off your balance at the end of the introductory period or you keep using your credit card for more purchases, you could be stuck with more high-interest debt in the end.

Pros of a balance transfer credit card

  • Pay down debt with no interest for a limited time.
  • With no interest accruing, every dollar you pay goes directly toward the principal of your balance.
  • Some balance transfer cards come with benefits like rewards on spending or consumer protections.
  • Most credit cards with 0 percent APR balance transfer offers don’t charge an annual fee.

Cons of a balance transfer credit card

  • Introductory balance transfer offers don’t last forever.
  • Any debt that remains when your introductory offer ends will begin accruing interest at the regular variable APR.
  • Balance transfer fees tack on 3 percent to 5 percent of your balance from the start.
  • You won’t get out of debt if you keep using your credit card for purchases.

What is a debt consolidation loan?

A debt consolidation loan is an unsecured personal loan that is used for the purpose of consolidating and paying down debt. Personal loans for debt consolidation offer a fixed interest rate, a fixed monthly payment and a fixed repayment timeline. This means that you can pay down debt without any surprises, and you’ll know from the start exactly when you’ll become debt-free.

For many people, using a personal loan to consolidate debt can make the debt repayment easier and more accessible. You’ll do this by paying off your existing debts with personal loan funds, then entering the personal loan repayment period. Typically, a personal loan will have a lower interest rate than those of your other debts, so you get the chance to save money.

Consolidating your debt doesn’t mean that your payments are stalled or that your debt is gone, however. It only means that you’ve moved your debt around. So while the interest payments may be less, you’ll still need to be diligent about paying off the loan on time and in full.

Pros of a debt consolidation loan

  • A fixed monthly payment and fixed repayment timeline make it easier to create a concrete debt payoff plan.
  • Get a competitive fixed interest rate for the life of the loan.
  • Personal loan repayment terms can last many years, giving you a longer time to pay off debt.

Cons of a debt consolidation loan

  • Some personal loans charge an origination fee.
  • You won’t get 0 percent APR like you would with a balance transfer card.

Balance transfer credit card vs. personal loan

Before you decide how to consolidate your debt, you need to know the differences between a balance transfer card and a debt consolidation loan. Choosing the right option based on your situation can potentially help you save thousands of dollars or make the process much easier based on your personality or circumstances.

As you compare debt consolidation loans and balance transfer credit cards, think over how each option might work based on the amount of debt you have. Here are six factors to consider when deciding between a balance transfer card and a debt consolidation loan.

Interest rates

Interest rates are the first, and probably most important, thing to look at when comparing credit cards and debt consolidation loans. Balance transfer credit cards offer an interest-free period upfront, but rates after the introductory offer are generally higher than an interest rate on a personal loan. This is especially true if you have good credit, says credit expert John Ulzheimer.

However, there’s virtually no such thing as an interest-free personal loan. With good credit, you can find a personal loan with an interest rate in the single digits, though you’ll be pressed to find close to a 0 percent APR loan. The average interest rate for a personal loan ranges from 4.99 percent to 35.99 percent. The average credit card rate (after the 0 percent intro period is over) is currently over 16 percent.

How long the 0 percent interest period lasts is also a key consideration. Ask yourself what your total amount of debt is and the average payment you’d have to make to pay it all off before your 0 percent interest period ends. If you have $5,000 in credit card debt and 0 percent APR for 18 months, for example, could you afford to pay $278 per month during that timeline to become debt-free?

If you can afford the monthly payments to pay off your debt before interest kicks in, then a balance transfer card could be right for you. If it’s not, you may want to consider a personal loan.

Get pre-qualified

Answer a few questions to see which personal loans you pre-qualify for. The process is quick and easy, and it will not impact your credit score.

Balance transfer fee

Many balance transfer offers include a one-time fee, which can add up to about 3 percent to 5 percent of the total amount of debt you transfer.

For example, if you want to transfer $5,000 to a new card that charges 0 percent interest for 12 months, you might be hit with a fee of $150 to $250. That’s still cheaper than a 12-month personal loan with an 11 percent interest rate, which would lead you to pay $303 in interest.

At the end of the day, you want to find the loan transfer option that lets you pay the least amount of interest possible. Use a debt consolidation calculator to see which option is cheaper for you.

Origination fee

If you look to an online lender for a personal loan, you should know that some of them charge a loan origination fee — a one-time charge that is taken out of the total amount you receive. However, banks and credit unions typically do not charge an origination fee on personal loans.

Origination fees can be as high as 8 percent of the loan in some cases. In other words, if you asked for a $5,000 loan to consolidate credit card debt, you might receive $4,600, with a $400 origination fee deducted from your balance.

If you plan to pay down debt with a debt consolidation loan, you should look for a lender that doesn’t charge an origination fee.

Fixed rates and payment schedule

Ulzheimer says that he favors personal loans for debt consolidation because the interest rate never changes and the loan has a fixed payoff date. With predictable payments, a debt consolidation loan can help with budgeting. If you’re not managing a credit card absolutely perfectly, then you may end up paying more for a longer time than you would have with a personal loan.

Steve Repak, a North Carolina-based CFP professional and author of “6 Week Money Challenge,” says that he favors a balance transfer because it’s more flexible than a personal loan.

“What if you lose your job or what if something comes up, some type of financial emergency where you can’t make that $500 payment?” Repak says. “A 0 percent transfer might give you some flexibility even though it might cost you more. With a fixed payment, you’re kind of stuck with that.”

As you’re deciding how to consolidate debt, look at your situation to see which makes sense for you. If you need help with budgeting and want fixed payments, a personal loan is a good option. If you’d prefer flexibility, a balance transfer credit card may be right for you.

Credit score impacts

Opening up a new card and transferring all of your credit card balances to it might push the utilization ratio on that card close to 100 percent, which could hurt your credit score. Credit-scoring models also place a negative emphasis on revolving debt, so if you keep transferring the debt from one card to another, your score could go down even more.

On the other hand, taking out a personal loan to consolidate debt could lower your utilization rate to 0 percent, which could help your score. Though you aren’t really getting out of debt, just converting it, the credit-scoring models don’t see it that way, so your credit score could rise — as long as you make timely payments on your loan.

Credit requirements

Debt consolidation loans and balance transfer credit cards do have one important thing in common. Lenders in both spaces offer the best rates and terms to individuals with very good or excellent credit — or any FICO score of 740 or above. With that being said, consumers with a “good” credit score (FICO score from 670 to 739) might also be approved for either option depending on the lender.

If your credit score is lower than that, it’s unlikely that you’ll find a balance transfer credit card you can qualify for. There are some secured credit cards with balance transfer offers, but they do not give you 0 percent APR for a limited time, and you’ll have to put down a cash deposit as collateral.

Conversely, it’s possible to qualify for a debt consolidation loan with bad credit, but you should expect to pay a higher interest rate overall. With that being said, a bad-credit loan could still help you save money, provided your new interest rate is lower than the current rates you’re paying.

Types of debt

As you compare debt consolidation loans and balance transfer credit cards, it can also help to think about the types of debt you have. Generally speaking, debt consolidation loans are a good option if you have multiple types of debt to consolidate. This is based on the fact that debt consolidation loans give you a lump sum upfront, which you can use to pay off medical bills, credit card bills, payday loans and any other debts you have.

By contrast, balance transfer credit cards can be a better option if you have only credit card debt. This is based on the fact that many balance transfer credit cards only let you consolidate other credit card balances. Balance transfer credit cards can also be a good option for paying down small amounts of high-interest credit card debt, due to their relatively short introductory periods.

Should I get a personal loan or a balance transfer credit card?

If you have high-interest debt you desperately need to pay off, it’s possible that you could make a case for a debt consolidation loan or a balance transfer credit card. However, both options tend to work best for different situations and for different types of consumers.

Debt consolidation loans tend to work best for:

  • People who need to pay down debts over a long period of time, or up to 10 years.
  • Anyone who wants the security of a fixed interest rate and fixed monthly payment.
  • People who need to stop using credit cards due to the temptation they bring.

Balance transfer credit cards tend to work best for:

  • Anyone who has a small amount of debt they can pay off during their card’s 0 percent APR introductory period, which will likely last 12 to 20 months.
  • People who have the discipline to stop using credit cards even after signing up for a new one.

Either debt consolidation option can work for your needs and goals, but you need to have a plan to get out of debt either way. No matter which option you go with — a debt consolidation loan or a balance transfer credit card — learning to live on less will be the key to your success.

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