Balance Transfer Vs. Personal Loan: Which One Should You Use?

Let’s suppose you’re overwhelmed and under water in credit card debt despite your best efforts to avoid this scenario. Unfortunately, it can happen to the best of us. Fortunately, you can get out of credit card debt – as long as you manage to find the best solution for you and your situation.

Balance transfers and personal loans are two options for debt consolidation, and both have their benefits and drawbacks compared to each other. Let’s break down their differences so you can decide which, if either, option works well for you. Let’s take a look.

While both balance transfer cards and personal loans can be used for debt consolidation, they work in very different ways.

Balance Transfer Cards

A balance transfer occurs whenever you take the outstanding balance on one or more credit cards and move it all over to a brand new card. This new card is then referred to as a balance transfer card.

Pros

• Many credit card issuers offer a 0% annual percentage rate (APR) on their balance transfer cards for the first 12 – 18 months.
• Borrowers can pay off their debt faster without incurring interest during the promotional period of time.
• Some balance transfers offer additional rewards, like cash-back bonuses or redeemable points.

Cons

• If you have poor credit, you might not qualify for a 0% APR introductory period.
• Some credit card companies charge a balance transfer fee.
• Depending on the amount of debt you have, it might be difficult to pay off your balance before the 0% APR period ends.

Personal Loans

A personal loan is usually a type of unsecured loan, and it gives borrowers a lump sum they can use to pay for almost anything. Some people will use a personal loan to consolidate their credit card debt and pay it all back with lower interest rates than they’d owe a credit card company. In this case, the personal loan would be considered a debt consolidation loan.

Pros

• Most personal loans use fixed interest rates, meaning borrowers have consistent monthly payments.
• Borrowers can use their lump sum to consolidate multiple debts, including credit cards, medical bills and other types of financing.
• Personal loans can come with long repayment terms and larger loan limits.

Cons

• Personal loans carry strict credit score and income requirements, so you might not qualify for a good interest rate if you have a low credit score.
• You might have to pay an origination fee.
• Even if you qualify for a low interest rate, you probably won’t be able to secure a 0% APR.

While both a personal loan and a balance transfer credit card are viable options for debt consolidation, they involve differing requirements, limits and fees that may affect which is best for your situation.

Let’s take a surface-level look at their differences before taking a deeper dive.

Credit Requirements

Some common ground between balance transfer credit cards and personal loans lies in the fact that they both typically require a good or excellent credit score to qualify.

It’s unlikely you’d qualify for a balance transfer card unless you have a credit score of 670 or higher. A lower credit score may get you a secured balance transfer without a 0% APR introductory period. Additionally, the secured card will require a cash deposit as collateral.

With personal loans, a higher credit score will qualify you for more advantageous rates and terms. If your score is 649 or lower, you could see less-than-favorable interest rates, but you may still get a loan all the same. If those rates are lower than what you’d face paying back your credit card debt, you could still be saving yourself some money.

Interest Rates

As discussed above, the introductory period for most balance transfer cards charges 0% APR for a set amount of time. If that period ends before you’ve paid back your debt, though, you’ll be hit with the higher interest rates generally associated with credit cards, and you may wind up back where you started under a mountain of debt.

Interest rates for personal loans largely hinge on the strength of your credit score. Another factor is your debt-to-income ratio (DTI) – you wouldn’t want that ratio higher than 36%. A “good” credit score of 650 or higher can net you decent rates, but better deals come with higher scores. Personal loans typically have fixed-rate repayment plans, too, so your monthly payment will consistently be for the same amount.

Credit Limits

How much you’re able to borrow can be the best indicator of which option you should pick.

Balance transfers are better used for smaller debts that could be paid off in a short amount of time – nothing larger than $20,000 if you want to finish paying within the introductory period. Otherwise, a balance transfer doesn’t necessarily have a cap, and it really depends on how much you’re transferring over and your available credit limit.

Personal loan lenders generally stop at $50,000, and in certain cases may lend up to $100,000 to borrowers. With such a larger amount available, personal loans would be the way to go if you’re in substantial debt.

Repayment Periods

Balance transfer credit cards offer relatively flexible repayment schedules, but interest rates play a huge factor in how long you should take to repay your loan. Introductory periods are just that – “introductory.” After 12 – 18 months, that 0% APR is replaced by high-interest charges typical of most credit cards. So, while technically flexible, you should think of your balance transfer repayment period as the length of the introductory period, so you can avoid those high interest rates.

Personal loan terms are contingent on your creditworthiness but are often shorter and at a fixed rate. Most lenders offer terms of 12 – 60 months. This can be good for borrowers because they won’t be locked in to paying off a debt for years and years and they’ll know exactly what they owe every monthly payment. Even with interest, a borrower will see few surprises down the line while repaying their loan.

Associated Fees

Most balance transfer cards require a one-time fee paid to transfer your balance amount over. This can cost 3% – 5% of your total amount. Let’s say, then, that you want to transfer a total balance of $6,000 to the new card. That would likely equal a fee of $180 – $300 on top of your debt. Some cards may also charge annual fees.

Many personal loans come with a one-time origination fee equaling 1% – 10% of the total amount borrowed. An origination fee covers the costs for lenders to process and deliver a loan. The origination fee is often taken out of the approved loan amount rather than charged separately.

An origination fee from Rocket Loans^SM typically amounts to up to 9% of your approved loan amount.

Effect On Credit Score

Maxing out a credit card can negatively impact your credit score, and transferring a large balance onto a new card could push your credit utilization close to the edge. Opening new credit accounts can also bring your score down by lowering the average age of your accounts, especially if you get into a habit of consistently transferring debt onto a new card every few years.

Approval for a personal loan involves a hard inquiry, which can lower your FICO^® Score by about five points, regardless of whether you’re approved. Since that part of the process is unavoidable, you’ll just need to make on-time monthly payments to build up your credit again.

Application Process

Fortunately, both a balance transfer and personal loan involve relatively straightforward and quick application processes.

Getting a balance transfer credit card starts with you researching and comparing the best cards for your situation and needs. Once you’ve decided on one, you can apply online following the website or mobile app’s instructions, or you can call the card company and speak with an agent.

The application process for a personal loan begins with a prequalification from one or more lenders you’re interested in working with. Your prequalification will inform you of what rates and terms you qualify for – which you can then use to find the best deal. Once you choose a lender, you can apply online or talk with a representative over the phone. Thankfully, a personal loan doesn’t take long to get. In fact, you may hear back in 1 – 7 business days, and you might even receive your funds within that time, too.

Rocket Loans offers same-day financing on personal loans and can potentially issue funds the same day you’re approved.¹

If you still can’t decide if a personal loan or balance transfer is right for you, you can ask yourself the following questions to help narrow down your options:

• How much debt do I have? As mentioned above, a balance transfer works best for small amounts of debt. If you have more than $20,000, a personal loan for debt consolidation could work better for you.
• What type of debt do I have? Balance transfers can usually only be used to consolidate high-interest credit card debt. If you have multiple forms of debt, a personal loan could be your only option.
• What’s my credit score? Both personal loans and balance transfer cards require a strong credit score. However, if you have poor credit, you might not qualify for the 0% APR promotional period – the best feature of using a balance transfer.
• Do I want a consistent monthly payment? Credit cards use variable interest rates, and a borrower only has to make a minimum payment each month. That means your monthly payments won’t be consistent. Conversely, a personal loan’s payment will be consistent from month to month.

If debt consolidation sounds like your way out of crushing debt, you have options. Balance transfer cards and personal loans accomplish the same goal in different ways, and each has its own pros and cons. Whatever route you take to escape your debt, make sure it’s the best one for your situation.

And if you’ve decided a personal loan is right for you, get started today with Rocket Loans.

¹ Same Day Funding available for clients completing the loan process and signing the Promissory Note by 1:00PM ET on a business day. Also note, the ACH credit will be submitted to your bank the same business day. This may result in same day funding, but results may vary and your bank may have rules that limit our ability to credit your account. We are not responsible for delays which may occur due to incorrect routing number, account number, or errors of your financial institution.