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The Differences Between Balance Transfer Credit Cards and Personal Loans

The Differences Between Balance Transfer Credit Cards and Personal Loans
Jason Steele

Jason Steele

Updated May 17, 2022
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
If you have numerous debts, then you might be looking for a way to consolidate them. Doing so can offer you the opportunity to make fewer payments every month while enjoying a lower interest rate. Two of the most popular ways to consolidate your debts are credit card balance transfers and personal loans. Each has its own strengths and weaknesses. For instance, while balance transfers can offer brief 0% APR introductory periods, a personal loan may allow you to tackle larger amounts of debt thanks to their fixed monthly payments. Read on to learn more to help you decide between a balance transfer or personal loan. 

What Is a Balance Transfer Credit Card?

A balance transfer credit card is a type of credit card that allows you to transfer an existing balance to it from another account. The balance transfer credit card pays off the debt from the other account, and then creates a new balance within its account. Usually, a balance transfer fee of 3% or 5% applies to the balance transferred. The top balance transfer cards offer 0% APR promotional financing for a limited time. These introductory financing periods can be as little as six months, or extend to 18 months or longer. After the promotional financing period ends, the standard interest rate will apply to any remaining balance. Ideally, you’ll pay off your debt before the promotional period ends to take advantage of the lower — or zero — interest rate.

How Do Balance Transfer Credit Cards Work?

If you have good or excellent credit, then you may qualify for a credit card with a 0% APR promotional financing offer on new purchases, balance transfers, or both. Once approved for a new card, you’ll receive an account with a credit limit that represents the maximum amount that you can borrow. Even before you receive your card in the mail, you’ll be able to contact the card issuer and request a balance transfer. The card issuer will ask for the name of the account you want to transfer your balance from, along with the amount to transfer and the account number. It may take a few days to complete the balance transfer, and you should always continue to make payments to the existing account until you can confirm that the balance has been paid off. With most promotional financing offers for balance transfers, the 0% APR offer is only valid on transfers made within a limited period of time, such as within 30 or 60 days of account opening. Remember, your account is opened on the day it was approved, not when your card was mailed, received, activated, or used. If you’re unsure of your account opening date, contact your card issuer to confirm. 

What Are Personal Loans?

First, some personal loans 101: A personal loan is a method of borrowing money and repaying it in fixed, monthly payments. Because of this, personal loans are often called installment loans. While some personal loans are secured by collateral, most are unsecured loans. You can use a personal loan for just about any purpose, including using personal loans to pay off student loans. You might get tripped up on the difference between personal loans vs. debt consolidation loans, but really debt consolidation is just one of the many uses for a personal loan.

How Do Personal Loans Work?

When you apply for most personal loans, you’re not relying on securing it with an asset such as real estate or a vehicle. Instead, you’re applying with your personal guarantee of repayment. As such, the lender will look at your credit history and credit score to determine your creditworthiness. After doing so, the lender will either approve or deny the loan. If approved, your creditworthiness will determine the interest rate you receive and the size of the loan. Some personal loans have extra fees, such as origination fees. Once closed, the loan will have a fixed repayment schedule that requires payments each month. With most personal loans, your balance and payment history are reported to the major consumer credit bureaus.

Pros and Cons of Personal Loans

If you’re thinking about taking out personal loan, there are both advantages and disadvantages of personal loans to consider before moving forward:Pros and Cons of Balance Transfer Credit CardsJust like personal loans, balance transfer credit cards have advantages and drawbacks to consider as well. Specifically, here are the pros and cons of balance transfer credit cards to know about:

Personal Loans vs. Balance Transfer Credit Cards: Weighing Which Choice Is Best for You

If you’re trying to decide whether a balance transfer or personal loan is a better choice for you, there are several considerations to take into account. While both options can help you to pay off debt, they’re not created equal. In general, a balance transfer credit card is better suited to a smaller amount of debt that you’re confident you can pay off before the promotional APR period expires and the higher standard APR kicks in. Also keep in mind that you’ll generally need a good to excellent credit score (generally 670+) to be eligible for these offers. Plus, you’ll usually incur a balance transfer fee, though there are some cards with no balance transfer fee.With a personal loan, you won’t have a special introductory period, but you will have fixed monthly payments and an interest rate that’s generally lower than the standard credit card APR. Plus, you might not need as stellar of a credit score to qualify. Again, however, you’ll likely owe fees, with origination fees for personal loans typically ranging from 1% to 10%.

What to Consider When Refinancing Debt

When you are refinancing your debt, there are several factors that you should consider.

Interest Rates

You want to compare interest rates from different lenders when applying for a debt consolidation loan. Once the introductory period ends on a balance transfer credit card, the standard rate might be higher than those of personal loans. But with a personal loan, you can  have a fixed rate and fixed payments throughout the life of the loan. 

Fees

In addition to interest rates, it’s important to consider any fees charged by personal loans or balance transfer fees. For example, there are some lenders that offer 0% interest on personal loans, but charge a high processing fee. And balance transfer credit cards will usually charge 3% or 5% balance transfer fee on the amount transferred. Also, most personal loan companies will charge an origination fee, and some balance transfer credit cards charge their customers an annual fee. Typically, you will incur an origination fee at the rate of 1% to 10% of the entire loan amount being transferred. Finally, there are some personal loans that charge a prepayment penalty when you choose to pay off the loan early. Especially if you think you might like to have that option, make sure to look out for these fees.

Fixed Rates and Payment Schedules

Your ability to repay a loan on time not only boosts your credit score but also helps avoid penalties. Personal loan payments remain fixed throughout the repayment period. But with a balance transfer credit card, you’ll be able to make payments of different amounts each month, so long as that amount exceeds the minimum payment. 

Credit Score Impacts

Taking on a new loan or signing up for another credit card could impact your credit score. Opening a new account can cause a small, temporary drop in your credit score due to the hard inquiry that the lender will conduct when reviewing your application.However, the most important determinants of your credit score are your level of debt compared to your total available credit and your payment history. Opening a new credit card account will increase the amount of credit you have, potentially reducing your credit utilization ratio for a given amount of debt. And if you make your payments on-time, you’ll add positive information to your credit history. 

Credit Requirements

Both credit card and personal loan lenders will assess your creditworthiness and look at your income. And with both types of loans, having a better credit score and a higher income will allow you to qualify for a larger loan (or credit limit) with a lower interest rate. Most balance transfer credit cards with 0% APR promotional financing require good or excellent credit in order to qualify. Other credit cards offered to those without good or excellent credit may allow balance transfers to the standard interest rate, which is generally above average. There are some personal loans that you can qualify for without good or excellent credit, though these will generally have high interest rates.. 

Types of Debt

To decide the best approach to paying off your debt, it’s first helpful to assess the types of debt you have. A personal loan can work better if you have multiple types of debt that you need to pay off, such as medical bills, credit card debt, and payday loans.If you only have credit card debt, then a balance transfer card may be worth considering. This is because balance transfer credit cards only allow you to consolidate credit card debt.

Alternative Ways of Refinancing High-Interest Debt

A borrower isn't limited to personal loans and balance transfer credit cards to tackle their debt. Other avenues you might explore include: 
  • Try a common debt payoff strategy: If you feel like you can DIY it, an option that will allow you to avoid fees and further interest, you could explore some of the popular debt payoff strategies that are out there. For instance, with the debt snowball method, you pay off the smallest of all of your loans as fast as possible, while still making the minimum payments on your other loans. Another choice is the avalanche method, where you focus on paying off the loans with the highest interest rates first.
  • Look into a debt settlement plan: You can opt for a debt settlement plan if you're struggling to make payments on time. Debt settlement involves negotiating with your creditor to pay less than the initial loan balance. There are attorneys and debt settlement firms that can help you with this process. While debt settlement could be appropriate for your needs, keep in mind that it could also hurt your credit score.
  • Consider credit counseling: Another option you could explore to get back on track is working with a nonprofit credit counseling organization. These organizations can offer you advice to get back on track and help you create a budget. They may also help you organize a debt management plan to pay off your debts.

Explore Personal Loan Options With Lantern

As you can see, there are pros and cons to both balance transfer credit cards and personal loans for debt repayment. Which choice is right for you depends on your financial situation and how quickly you think you can pay off your debt, among other factors. Of course, it also helps to find an option with a low interest rate and minimal fees. If you’re looking for debt consolidation options, consider exploring personal loan rates with Lantern. Once you provide a little information about yourself and the loan you need, you can easily compare your options and apply for a loan in just minutes.
Photo credit: iStock/fizkes
*To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. A hard credit pull, which may impact your credit score, is required if you apply for a SoFi product after being pre-qualified.Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website on credit (https://www.consumer.ftc.gov/topics/credit-and-loans)The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.SOLC1221069

Frequently Asked Questions

Why can refinancing credit card debt be good?
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About the Author

Jason Steele

Jason Steele

Jason Steele has been writing about credit cards and award travel since 2008. One of the nation's leading experts in this field, he has contributed to dozens of personal finance and travel outlets and has been widely quoted in the mainstream media.
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