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When it comes to consolidating debt and lowering your interest expense, credit card balance transfers and personal loans can be two excellent and similar options.
However, like most financial products, both balance transfers and personal loans have pros and cons to consider. For example, while balance transfers may have a 0% intro APR, they often come with a fee and have relatively short promotional periods.
With that in mind, here's a guide to help you decide which is the best choice to help you take control of your debt.
It used to be rather difficult to obtain a personal loan, especially if you didn't want to pledge collateral. That's changed in recent years, as many online lenders and traditional banks have rapidly expanded into the unsecured personal loan market.
In most cases, you can check your ability to obtain a personal loan without initiating a hard credit inquiry, meaning that it won't affect your credit score to see if you qualify and what your interest rate might be. You can find personal loans in amounts ranging from $1,000 to $100,000 from a variety of lenders.
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When you're looking for a personal loan, focus on lenders offering low interest rates and fees. These hidden costs can eat into your budget if you're not careful! For a list of our experts' favorite lenders, check out our best personal loan lenders page.
There are many situations when using a personal loan to borrow money may be ideal, such as:
But personal loans are not a good option for every circumstance. Here are some of the drawbacks of personal loans:
A personal loan is likely the best choice for borrowers who aren't certain of their ability to pay off their debt within a year, or who may be tempted to simply make the minimum payments on a balance transfer credit card. Personal loans can also be excellent ways to get a quick boost to your credit score, as it's a more favorable form of debt than credit cards in the eyes of the FICO scoring formula.
And finally, personal loans can be the best choice if you have more than just credit card debt to consolidate or pay off. For example, if you have:
You can obtain a $25,000 personal loan to take care of all of these things at once, as loans in this amount are offered by virtually every personal lender on our radar. It might be tough for the average person to find a balance transfer credit card with a $25,000 limit.
Transferring a balance to another credit card can be a quick and easy way to pay off debt, as the process generally involves filling out a credit card application and some information about your existing credit card accounts. There are some excellent 0% intro APR balance transfer offers on the market right now, and you can read our updated list of the best balance transfer credit card offers to see what's currently available.
Like personal loans, there may be certain circumstances that make a balance transfer an ideal fit:
Also like personal loans, balance transfers do come with their own set of drawbacks:
It makes the most sense to take advantage of a balance transfer offer if your debt is relatively small and you're confident that you can pay it off in its entirety before the 0% intro APR period ends. Sure, you can theoretically obtain another balance transfer at that point, but it's not a smart idea to count on it.
Plus, balance transfers can be great if you want the flexibility to make new purchases, as many credit cards with balance transfer offers also have excellent 0% intro APR periods for new purchases.
We have a free balance transfer calculator to aid you in your decision.
It's certainly possible to use both methods of debt consolidation to your advantage. For example, let's say that you have $20,000 in high-interest credit card debt, but you know that there's no way you can pay it off during a 0% intro APR window with a balance transfer credit card.
You could choose to transfer a manageable amount of the debt onto a balance transfer credit card with a 0% intro APR, and then obtain a personal loan for the rest. This way, you're avoiding interest on as much of your debt as possible, but without the risk of a high credit card interest rate kicking in on the rest before you can pay it off.
The point is that while both methods have pros and cons, you don't necessarily have to choose one or the other. The best solution to your debt management could be some combination of the two.
Here are some other questions we've answered:
Looking for a personal loan but don’t know where to start? Our favorites offer quick approval and rock-bottom interest rates. Check out our list to find the best loan for you.
Balance transfers aren't necessarily bad for your credit when used correctly. A balance transfer can help you pay off your debt quicker, which can help increase your credit score over time. However, a balance transfer could potentially harm your credit score initially, especially if your balance transfer results in the credit card being nearly maxed out.
Personal loans can be a good option for transferring credit card balances, especially if you need a longer time horizon to pay it back than the card's 0% intro APR period.
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We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.
We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.