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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 SteeleUpdated September 26, 2023
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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?

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. 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. The lender will also look at your income and your debt-to-income ratio. 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 and can help build your credit with on-time payments.Recommended: How Many Personal Loans Can You Have at Once?

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 of Personal LoansCons of Personal Loans
Higher limit allows the borrower to consolidate multiple debts, such as several credit cards or personal loansSome lenders charge high origination fees
If your credit score is excellent, the APR can be lower than averageYou won’t qualify if your credit score is low
You’ll have fixed rates and a set repayment scheduleLonger repayment times can delay paying off debt
Some lenders will directly pay off your credit card debt, saving you from lengthy processing times
Longer repayment plans may be available

Pros and Cons of Balance Transfer Credit Cards

Just 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:
Pros of Balance Transfer Credit CardsCons of Balance Transfer Credit Cards
Some cards offer a 0% APR period, which can allow you to save on interestYou’ll need a good or excellent credit score to qualify
Some balance transfer credit cards can offer valuable rewards and benefitsMost cards have a balance transfer fee
After paying off the loan, your account will stay open, which can help your credit scoreThe standard interest rate will apply after the promotional rate expires

Personal Loans vs. Balance Transfer Credit Cards: Key Differences

The main difference between personal loans and balance transfer credit cards is that personal loans typically have lower, fixed interest rates and set monthly payments. A balance transfer credit card will usually have a higher interest rate than a personal loan, and the rate is almost always variable. If you have a significant amount of debt, a personal loan may be in your best interest.A balance transfer credit card may work best if you only have one type of debt you’re looking to transfer. If you have multiple loans and credit cards that you want to consolidate, a personal loan may better serve that purpose.

Choosing Between Personal Loans and Balance Transfer Credit Cards

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%.
Personal LoansBalance Transfer Credit Cards
Suited forLarger amounts that might take longer to repaySmall loans that take a shorter period to pay off
Repayment optionsMake fixed payments for the life of the loanAim to pay the balance before the introductory period expires to avoid higher interest rates
Eligibility criteriaGood credit required, though there’s are bad credit loansMust have a good to excellent credit score
FeesOrigination fee of 1%-10%Balance transfer fee of 0%, 3%, or 5% of the amount transferred

Using a Combination of Personal Loans and Balance Transfer Credit Cards

Depending on how much debt you have, your credit score, and what your current debt-to-income ratio and credit utilization ratio are, you could consider using both a personal loan and a balance transfer credit card to consolidate and pay off your debt.First, consider a balance transfer credit card to take advantage of the 0% introductory rate. Before the rate expires, assuming you still have a balance, you could pay it off with a personal loan. Personal loans typically come with lower interest rates than credit cards, so this can help save money on interest on the debts that you owe.While transferring your debt back and forth can help you save on interest, keep in mind that both personal loans and balance transfer credit cards charge fees. Personal loans typically come with origination fees, and balance transfer credit cards charge a transfer fee. Make sure the fees aren’t negating any potential savings when formulating your debt payoff plan.

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. With a personal loan, you can have a fixed rate and fixed payments throughout the life of the loan. 


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. Balance transfer credit cards will usually charge a 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.Finally, there are some personal loans that charge a prepayment penalty when you choose to pay off the loan early. 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, your payment may change each month due to variable rates that typically come with credit cards.

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 or taking out a personal loan 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. 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, as well.

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: 
  • Use a debt payoff strategy: A debt payoff strategy could allow you to avoid fees and further interest. 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: 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.

The Takeaway

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.

Frequently Asked Questions

Which is the best to reduce credit card debt: personal loan or balance transfer?
Which is better to rebuild credit: balance transfer or personal loan?
Does a personal loan or a balance transfer impact your credit score more?
Photo credit: iStock/fizkes

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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