Personal Loan vs. Credit Card Balance Transfer: Which Is Best for You?

This post may contain affiliate links which may compensate us based on your interaction. Please read the disclosures for more information.

These are two solid options to help get rid of your debt, but there are some key differences. Find out what you need to know. 

Credit card balance transfers and personal loans can both be useful tools to help you get out of debt faster. However, there are some big differences between the two, and one might be far superior to the other for your situation. In this article, we’ll take a look at some of the most important things to keep in mind on your debt reduction journey.

Reasons to consider a balance transfer

Even in the rising interest rate environment we’re in, there is no shortage of excellent credit card products that offer balance transfers with 0% APR for as long as 18 months. Because of this, balance transfer cards can be an economical way to pay off debt. After all, if you transfer a balance at 0% APR, every penny you pay the credit card company reduces the principal.

It’s important to point out that most balance transfer offers come with a one-time fee. It typically ranges from 3% to 5% of the amount transferred. But this can still save you tons of money on interest when paying off debt, especially considering the current average credit card APR is about 24%.

In addition to offering a 0% APR on balance transfers, many of our favorite balance transfer credit cards also offer a 0% intro APR for new purchases, in addition to rewards programs that allow you to earn cash back or reward points.

Advantages of a personal loan

The biggest advantage of a credit card balance transfer is cost. There are some of our favorite personal lenders that still offer relatively low interest rates, but you aren’t going to find a 0% APR. However, the biggest advantage of using a personal loan to consolidate and pay off debt is time.

Typical balance transfer offers are for 12 months or so, and even the best offers typically extend to 18 months or 21 months. The catch is that if you don’t pay off the entire balance before the introductory term expires, the credit card’s normal purchase APR kicks in.

On the other hand, personal loans generally range from three to seven years in length. They allow you to spread out your debt repayment over a term that results in a payment that fits your budget. Also, personal loans are structured so they will be completely paid off at the end of the term. Balance transfer credit cards have a minimum payment due each month, but it usually won’t be nearly enough to pay the entire balance off before the introductory period ends.

Yet another reason to use a personal loan is that installment debts are typically counted more favorably in the credit scoring formulas than revolving debts (like credit cards). And this can be especially true with balance transfers. Think of it this way — if you open a new balance transfer credit card with a $10,000 limit and proceed to transfer $9,000 worth of existing balances onto it, you’ll now have a nearly-maxed-out credit card weighing on your score.

Which is best for you?

Here’s the key takeaway. A balance transfer credit card is an economical way to consolidate and get rid of debt that you can manage to completely pay off relatively quickly. You’re not likely to find a personal loan with a 0% APR like most balance transfer offers, but it can give you a fixed monthly payment and term length that is manageable for your budget.

No two financial situations are the same. The best choice for you depends on how much debt you have, how much you can afford to pay each month, and more. But these are two excellent financial tools at your disposal, and both can help you tackle your debt.

Alert: highest cash back card we’ve seen now has 0% intro APR until nearly 2025

If you’re using the wrong credit or debit card, it could be costing you serious money. Our experts love this top pick, which features a 0% intro APR for 15 months, an insane cash back rate of up to 5%, and all somehow for no annual fee.

In fact, this card is so good that our experts even use it personally. Click here to read our full review for free and apply in just 2 minutes.

Read our free review

We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

 Read More