Published in: Credit Cards | Oct. 9, 2019

Personal Loan or Balance Transfer: What's the Best Way to Consolidate Debt?

Although both balance transfers and personal loans can be used to consolidate debt, they work very differently. Which is right for you? 

Consolidating debt means you borrow from one new lender or creditor and use the money to pay multiple existing debts. It can simplify the debt repayment process and help you to save on interest costs. 

Both personal loans and balance transfer credit cards can be used to consolidate debt. But there are big differences between the two approaches that you need to understand when deciding how to pay off what you owe. 

A woman and her bulldog looking through a pile of bills on the floor.

Image source: Getty Images

Personal loans are often the best choice if you owe a lot, know that you need a long time to repay your debts, or have debt that's not on a credit card. Balance transfers, on the other hand, could be a better option if you want to keep costs as low as possible. It's often simpler to get a balance transfer card, which means this can be an easier and quicker bet.

This guide will provide more insight so you can choose the method of debt consolidation which is right for you.

Personal loans allow you to consolidate debt that's not on a credit card

Credit card balance transfers are useful for consolidating credit card debt because you can move money from one credit card to another. But if you have other types of debt, such as private student loan debt, medical debt, or payday loan debt, there's often no way to transfer this money to a card.

With a personal loan, on the other hand, your lender gives you a check or deposits the borrowed amount directly into your bank account. You can then use the borrowed funds for any purpose you'd like -- including paying off any outstanding loans. 

If you have many different kinds of debt you're hoping to combine into one new loan, the flexibility that comes with personal loan funds can make this a better choice for debt consolidation.

Personal loans can allow you more time to become debt-free

One common goal of debt consolidation is to lower the interest rate you're paying, as well as combine all your debts into one. Credit card balance transfers can lower the interest rate on the debt you're consolidating -- but only temporarily.

A good balance transfer card should offer a 0% promotional rate, which will lower the interest rate on your existing debt. However, this rate lasts only for a limited duration -- which usually tops out at 15 months, depending on which balance transfer credit card you use. 

This means that if you consolidate a bunch of credit card debt through a balance transfer, you'll have a maximum of a little over a year to pay off the entire balance before your interest rate rises. This jump in interest can be substantial because the standard credit card APR is usually well above 15%. So, if you are transferring a balance, you need to be sure you can pay it off before the 0% rate expires.

Personal loans, on the other hand, are often designed to be repaid over a longer period of time. Many personal loans are set up to be repaid over three to six years, but some lenders give you even longer to repay what you owe. This longer repayment timeline means your monthly payments will be lower than the ones you'd need to make to pay off your transferred balance in full before the end of a card's 0% APR period. 

Personal loans provide more certainty about total payoff time and costs

When you consolidate debt with a balance transfer, your new balance transfer card will only require low minimum payments. If you only make these small minimum payments, you are unlikely to pay off the balance before the 0% rate expires. And, in fact, may not pay off what you owe for decades to come. 

Since you can choose how much to pay above the minimum with a credit card, it can be hard to stay motivated and on track to pay off the card within your preferred schedule. And if you don't know exactly how much you'll pay each month, it's hard to predict either total payoff time or total payoff costs.

Personal loans, on the other hand, have fixed repayment timelines that you agree with your lender up front. And your monthly payment amount is set up so your loan is paid off within the designated time. If you opted for a fixed-rate personal loan (rather than a variable rate one) your monthly payment also won't change throughout the entire repayment period -- which isn't the case with a balance transfer card if the 0% promotional APR expires.

Since you'll know the payoff date and total payment costs of a personal loan up front, this method of consolidating debt provides much more certainty than a balance transfer. 

Personal loans can allow you to consolidate larger amounts of debt

With most credit cards, the card issuer sets a maximum amount you can borrow when you apply for the card. The credit available to you is your credit line and the maximum amount is your credit limit. Many cards also set separate balance transfer limits. For example, it's common for credit card issuers to cap you at transferring a $5,000 balance to your card.

Unfortunately, the credit line available to you for balance transfers may not be large enough to make consolidating all of your debt possible. If you owe $30,000 in total debt on credit cards and other loans, it is unlikely you'd be able to get a credit card balance transfer that allows you to transfer anywhere near that much to your card.

Personal loans, on the other hand, are available from many lenders for between $40,000 and $100,000 depending on the borrower’s creditworthiness. Since you can borrow a much larger amount with a personal loan, you can consolidate much more debt than you'd otherwise be able to using a balance transfer. 

Balance transfers can cost you less than personal loans

Balance transfers sometimes have a big upside that personal loans don't: They may cost less.  Remember, a good balance transfer card will charge no interest for many months. And while some cards charge a fee of around 3% or 4% of the amount transferred, others charge nothing for it. 

On the other hand, you won't find a personal loan that charges 0% interest. You will pay at least some interest on borrowed funds starting from when you get the loan. This makes a personal loan more expensive than many balance transfers during the 0% APR period.

As long as you can pay off the credit card debt before the 0% promotional rate expires, you could have 100% of your payment go towards the principal and not waste any money on interest at all. This makes debt repayment cheaper than if you used a personal loan that charged you interest every month. 

Balance transfer cards could be easier to qualify for

Many credit card issuers make it very quick and simple to submit an application and open a card. Sometimes, all you need to do is provide your Social Security number, contact details, and income. 

Personal loans, on the other hand, often have more in-depth applications that need to be completed and you may have to provide more financial information to get approved for a loan. This can make consolidating debt with a personal loan more hassle than it would be to simply click a few buttons and apply for a credit card. 

Is a personal loan or balance transfer the best way for you to consolidate debt?

Now you know the benefits of both personal loans and balance transfers as ways to consolidate debt. To decide which is right for you, you'll have to consider the amount of debt you have, how long it will take you to repay it, and what type of debt it is. 

If you have good credit, can qualify for a personal loan at a low rate, and don't want to worry about your 0% balance transfer APR expiring before your debt is paid down, you should likely opt for a personal loan. 

But if you hope to pay no interest on your transferred debt, don't owe a fortune, and want to quickly get approved for a balance transfer card and get your debt paid off ASAP, then a balance transfer may be just what you're looking for.

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