Balance Transfer vs. Personal Loan | What Should You Choose?

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Paying down debt can be a very frustrating and difficult challenge, especially if your debts are spread across multiple accounts with different interest rates. But no matter how high your debt seems to go, there are always options. In particular, you can use balance transfer credit cards or personal loans to take control of your debt and start repaying it more actively. Let’s break down balance transfer credit cards versus personal loans, and examine their benefits, downsides, and determine which option is better for different situations.

What is a Balance Transfer Credit Card?

A balance transfer credit card is a unique type of credit card used to help you pay off high-interest debt. Balance transfer credit cards are not opened for “regular” debt use, such as purchasing an expensive item or doing renovations. Instead, they're exclusively meant to be used to pay off high-interest debt in manageable chunks. Due to the way they work, individuals don't usually pay off all of their debts using a balance transfer credit card. Instead, they can use these cards to chip away at larger amounts of debt in progressive chunks to help save money on interest.

How Do Balance Transfer Credit Cards Work?

In a nutshell, balance transfer credit cards allow you to transfer your existing debt to their accounts. These cards usually have 0% APR for a certain, usually limited timeframe. Without interest, your debt sits on that credit card instead of your previous credit card without gaining interest. This allows people with lots of high-interest debt to pay off their debts without having to deal with interest. For example, say that you had $1000 of debt with a 10% interest rate. You could transfer $500 of that debt to a balance transfer credit card with a 0% interest rate for three months. So long as you paid off the $500 on the balance transfer credit card within three months, interest would only accrue on the remaining $500 of debt. Most balance transfer credit cards have relatively limited 0% APR timeframes (on the order of a number of months). This means that balance transfer credit cards are best used by individuals who can pay off chunks of debt in the near future but who don’t want to have to pay very high interest on top of that.

Benefits of Balance Transfer Cards

Balance transfer credit cards have a number of benefits that may make them an excellent choice:

  • For starters, they don’t typically require individuals to pay interest , at least for their introductory 0% APR period
  • For another, balance transfer credit cards are sometimes easier to get approved for than many types of personal loans, even if you don’t have exceptional credit

Downsides of Balance Transfer Cards

Even though balance transfer credit cards could be a good idea, there are also some downsides to keep in mind.

  • Many balance transfer credit cards come with “transfer fees” that are usually between 3% and 5% of your total transferred debt . This means you’ll only be able to use many of the best balance transfer credit cards if you are willing to pay a fee upon opening your account.
  • Furthermore, balance transfer credit cards have limits as to how much debt you can transfer to them. This means you may not be able to use balance transfer credit cards to pay off larger debts by themselves.
  • Most balance transfer credit cards do require a small minimum monthly payment every month.
  • If you don't pay off the entire balance of a balance transfer credit card at the end of its 0% APR period, you could end up stuck with debt attached to a really high-interest rate again.
  • Even though you can find some balance transfer credit cards without an excellent credit score , many of the best cards do require relatively good credit.

What Are Personal Loans?

The other big option for paying down large amounts of debt are personal loans. Personal loans, of course, are any loans you acquire from a financial institution designed to help you pay down personal debt, make personal purchases, and so on. Many people take out debt consolidation loans trying to manage multiple individual debts. They’ll then pay back the personal loan over time, based on the agreed repayment period and APR, often saving money on high-interest debts with a new lower interest rate.

How Do Personal Loans Work?

Personal debt consolidation loans work by “consolidating” various types of debts into a single, easy to repay loan. For example, say that you have a variety of different debts weighing down your credit score:

  • $100 of credit card debt with an interest rate of 25%
  • $500 of prior loan debt with an interest rate of 15%
  • $400 of student loan debt with an interest rate of 8%

Certain financial institutions could provide you with personal debt consolidation loans. If you find a debt consolidation or personal loan worth $1000, you could take out that loan and use the $1000 to immediately pay back each of the above three separate debts. Once you do so, those multiple debts will stop dragging on your credit score and accruing interest. Instead, all you now have to focus on is paying back your single personal debt consolidation loan with its attached interest rate, which is often lower than the rate of the debts you’re paying on.

Benefits of Personal Loans

Personal loans can be extremely beneficial debt repayment tools depending on your circumstances:

  • Many personal loans are large enough that you can take out a single loan to cover all of your other debts . This makes repaying that much easier.
  • Many debt consolidation loans have lower interest rates than other loans and types of debt . By transferring all of your debt to a single debt consolidation loan, you may pay less money in the long run due to its lower interest rate than if you stuck with multiple smaller debts with higher interest rates.
  • It’s easier to keep track of one monthly payment toward a personal loan as opposed to keeping track of multiple monthly payments toward many credit cards or other debt accounts.
  • These loans are better for larger amounts of debt that could take you years to pay off entirely, such as business loans .
  • Even if you don’t have excellent credit, there are plenty of bad or poor credit personal loans availabl e. You still have to be wary of these, however, as some of them may further burden you with a high-interest rate than what you’re currently paying.

Downsides of Personal Loans

Though personal loans can be a great choice, you should also be aware of the potential downsides:

  • Lots of personal and debt consolidation loans also have origination fees . These are extra costs you need to account for when taking out these loans, and they can total between 1 and 8% of the total loan amount.
  • Every personal loan requires you to make fixed payments every month for the loan’s duration.
  • As mentioned, some poor credit personal loans are actually worse routes due to their high-interest rates and potentially high fees.
  • Many personal loans include extra fees for late payments and other penalties , which can quickly add up over time.

Which Should You Choose to Handle Your Debt: A Balance Transfer Card or a Personal Loan?

Both of the above options are powerful tools for handling your debt, especially if you have a lot of it from multiple sources. However, either can be a better option based on your circumstances:

  • Personal and debt consolidation loans are usually better if you have larger amounts of debt that you need to pay off over a long period of time
  • Furthermore, personal loans are great choices if you want to transfer multiple smaller debts to a single loan to make repaying your debt more manageable mentally and financially
  • On the flip side, balance transfer credit cards could be a good choice if you have a relatively small amount of debt with a high-interest rate . Transfer that to a balance transfer credit card, pay the debt off before the 0% APR period is gone, and you're set

Either option can be very effective, especially for individuals that make solid debt repayment strategies and stick to them. You may also consider using both personal loans and balance transfer credit cards in conjunction with one another to tackle different types of debt.


Ultimately, it’s up to you which of the two debt repayment strategies seems to be a better choice in the long run. Remember that institutions like Seek Capital are available to help you find the best balance transfer credit cards available to you. Contact us today to see what your options are and start taking control of your debt. Sources

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