Personal Loans or Balance Transfer Cards: Which Is Right for You?

Compare two ways to consolidate debt: a personal loan or a balance transfer credit card.

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Personal loans for debt consolidation and balance transfer credit cards are two common debt consolidation strategies that can lower the amount of interest you owe and help you pay off debt faster and more simply.

A key difference involves how many debts you want to turn into one. Debt consolidation loans are typically larger sums used to combine several debts, while balance transfers usually pay off smaller balances on one or two high-interest credit cards.

A debt consolidation loan rolls multiple debts into a single monthly payment that you pay over a fixed period, typically two to five years. These loans can have lower interest rates than most credit cards, which allows you to save money on interest over the life of the loan.

A balance transfer involves moving high-interest credit card debt to a new credit card that charges 0% interest for a period of time, usually 12 to 18 months.

Compare the pros of consolidation loans and balance transfer cards

Obtaining a debt consolidation loan or balance transfer credit card depends in part on your credit score. People with good or excellent credit (690 or higher on the FICO scale) have more options than those with bad credit (629 or lower on the FICO scale), and their interest rates will be lower.

Pros of debt consolidation loans

  • Loans can be large enough to consolidate multiple debts, including credit cards, other personal loans or medical bills.

  • Annual percentage rates may be low for those with good to excellent credit.

  • Some lenders will directly pay off your credit card, saving you that step.

  • Fixed rates and monthly payments are easier to budget and give you a payoff date.

Cons of debt consolidation loans

  • If you have bad credit, it may be difficult to qualify for a low enough rate on a debt consolidation loan.

  • Some debt consolidation loans charge an origination fee, which typically ranges from 1% to 10% of the loan amount.

  • Though longer repayment terms mean lower monthly payments, it may be a few years until you’re fully out of debt, which could delay other financial goals.

Pros of balance transfer credit cards

  • 0% APR period for 12 to 18 months saves you money on interest.

  • Once paid off, you’ll have another open credit line, which can boost your credit score.

  • Some balance transfer credit cards have no annual fee or include rewards, such as points or travel perks.

Cons of balance transfer credit cards

  • Balance transfer cards usually require good to excellent credit to qualify. Depending on the size of your debt, you also may not be approved for the full amount you want to transfer.

  • Some cards charge a balance transfer fee, which typically ranges from 3% to 5% of the amount being transferred.

  • If you’re unable to pay off your debt during the promotional period, you could end up with a higher interest rate than your original debt.

Consolidating your debt successfully

Consolidating can be an effective way to get a handle on your debt. But it won’t address spending habits that led to getting a debt consolidation loan or balance transfer card. Establishing a realistic budget that includes money for things you want as well as debt payments can help you keep spending in line.

Even more important is to avoid running up large balances on the credit cards you’ve paid off. A debt consolidation loan or balance transfer card won’t be helpful if it ends up breaking your budget and pushing you further into debt.

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