Balance Transfer vs. Personal Loan

Balance Transfer vs. Personal Loan

Written by Lisa Rennie
Fact-checked by Caitlin Wood
Last Updated October 4, 2022

If you have debt, you’re likely trying to figure out the easiest way to pay it down. After all, it’s not something you want looming over you forever. Fortunately, there are options out there to help you eliminate your debt, such as balance transfers and personal loans. Choosing a debt relief option can be challenging, but if you understand the nature of your options and the factors influencing your choices, you can adequately make a decision that works best for you.

Should You Use A Balance Transfer Or Personal Loan

To help you understand which option is more suitable for you, it’s important to understand how the two options work. 

How Does A Balance Transfer Work? 

A balance transfer credit card takes your existing credit card debt and transfers it to a new card that has a special interest rate for a set period of time. Usually, rates can go as low as 1.99% and terms can last anywhere from 3 months to a year, on average. By transferring your balance over to your balance transfer credit card, you can take advantage of a lower rate and pay down your debt within this time frame to save money.

However, once the introductory period ends, the rate will jump, often higher than other conventional credit cards. For this reason, it’s important that you make every effort to pay down your balance within the introductory period before your rate increases. 

Balance transfer credit cards let you transfer high-interest debt from another credit card, but some creditors may also allow you to move other types of debt, like car loans, personal loans, or student loans. Be sure to find out if this is possible by contacting your credit card issuer.

Do Balance Transfers Have Any Fees?

Balance transfer cards have a one-time transfer fee based on the total debt being transferred as well. Judgment should be exercised to determine if the transfer fee is worthwhile based on the offer you got with the balance transfer card.

How Does A Personal Loan Work?

The funds from a personal loan can be used for a variety of purposes, including covering the cost of home renovations, college tuition, and car repairs. A personal loan can also be a good option for consolidating high-interest debt, especially if you can secure a low-interest rate. 

With a personal loan, you apply for a specific loan amount and pay it back over the loan term, including interest and applicable fees. Typical loan terms for personal loans range from 6 months to 5 years, and loan amounts can range from $500 to $35,000, on average.

Balance TransfersPersonal Loans
Loan Terms6 – 18 months6 months to 5 years
Loan AmountsUp to credit limit$100 – $50,000
Interest Rates– 0% during the introductory period
– At par or higher than traditional credit cards (16.99% – 22.99%)
2% – 47%
When to UseWhen you want to repay high-interest credit card debt within 6 to 18 months– When you want to consolidate a variety of high-interest debts or cover a large expense.
– You require a longer period to repay it. 
Repayment TermsPay off entire amount within introductory periodFixed installment payments over specified loan term

How To Choose Between A Balance Transfer And A Personal Loan?

Balance transfers and personal loans have their own unique advantages and disadvantages. Those advantages and disadvantages can work in your favour, so long as you analyze your situation to determine the best option for yourself. Be sure to fully understand your finances before considering the factors below in order to make the best decision possible.

Advantages And Disadvantages Of A Balance Transfer

There are plenty of perks to a balance transfer, though there are also some drawbacks to consider:

Advantages Of A Balance Transfer

  • Interest – As mentioned, balance transfers usually have really low-interest rates to attract new customers. During the introductory period, you can take advantage of very low or no-interest credit card, which can save you a ton of money, especially if you’re carrying a high balance.
  • Pay The Principal – Every dollar you pay toward your credit card bill will go directly to your principal, which will help you pay down your debt a lot faster.
  • Flexible Payments – With a credit card, the payments are determined and managed entirely by the cardholder. Those who don’t struggle with their spending habits and enjoy financial flexibility may prefer balance transfers.

Disadvantages Of A Balance Transfer

  • Introductory Interest Rate Expiry Once the introductory interest rate period has passed, a new interest rate will be introduced which is typically higher than the interest rates you have on existing credit cards. 
  • Missed Payment Penalty If you miss a payment, the credit card issuer could cancel your promotional rate and charge you a penalty APR. In some cases, this APR could be as high as 29.99%.
  • Restrictions – Balance transfer cards sometimes restrict certain types of debt from being transferred to the new card. Typically credit card debt is transferable, although, student loans, auto loans, and mortgages are not. 
  • One-Time Balance Transfer Fee – Most balance transfer promotions require a one-time fee which costs around 3% to 5% of the total debt being transferred. If the balance transfer fee is cheaper than the interest on a personal loan for a given period, the balance transfer card is the better option.

Advantages And Disadvantages Of A Personal Loan

Like balance transfers, there are a handful of pros and cons to personal loans to consider before opting for this financial product:

Advantages Of A Personal Loan

  • Versatile – Personal loans don’t restrict what debt or expenses you’re trying to use it for. Usually, the new money is deposited into your account and you can choose where it goes. If you have debt that will be restricted by balance transfers, personal loans are definitely an ideal option.
  • Fixed Payments – Personal loans have regular, predictable payments based on a fixed interest rate and a set payoff date. Because the payments are set ahead of time, personal loans can help those who struggle with their spending habits stay on schedule and budget.
  • Longer Terms -You can have as long as 5 years or more to repay your personal loan, depending on what your lender allows. This makes personal loan payments easier to manage.
  • Lower Interest Rates If you have good credit and a healthy income, you may be able to qualify for a lower rate on a personal loan. A low rate means significant savings over the course of your loan term.

Disadvantages Of A Personal Loan

  • Origination FeeOnline lenders for personal loans tend to charge a loan origination fee which is a one-time charge taken from the total loan amount received by the borrower. Origination fees can be anywhere from 0.5% to 8% of the total loan amount and the fee is included in the loan’s annual percentage rate calculation.
  • High-Interest Rates – If you have bad credit, your lender will likely charge you a higher interest rate on your personal loan, which can cost you quite a bit in interest over the loan term. 

Cost Of A Balance Transfer And Personal Loan

When comparing the two options, it’s important to consider the costs of both options.  

Balance TransferPersonal Loan
Loan Amount$10,000$10,000
Interest Rate3.99%9%
Term12 months$24 months
Monthly Payment$851.50$456.85
Total Paid$10,218$10,964.4
Total Interest$218$964.4

Can A Balance Transfer Or Personal Loan Affect Your Credit?

Both a personal loan and a balance transfer can affect your credit in different ways. 

How Can A Balance Transfer Affect Your Credit? 

  • Debt-to-Credit Ratio – A credit card balance transfer can affect your debt-to-credit ratio. The higher your balance, the higher your credit utilization ratio will be, which can negatively affect your credit. 
  • Credit History – When you open a new credit card, it will affect your credit history, which refers to the average age of your credit account. New accounts will lower your credit accounts’ average age which could negatively affect your credit. 
  • Credit Inquiry – Whenever you open a new account, including balance transfer cards, the lender will likely check your credit which will appear on your report as a hard inquiry. This could negatively affect your credit scores. 
  • Payment History – As with all other debt, missed payments or frequent minimum payments can negatively affect your credit. 

How Can A Personal Loan Affect Your Credit?

  • Credit Inquiry – When you apply for a new credit product, including a personal loan, the lender may perform a hard credit check. Hard inquiries remain on your credit report for around two years and could negatively impact your credit. 
  • Payment History – How you manage your new personal loan is an important factor in your credit score calculation. Late or missed payments can negatively impact your credit. 

Should You Get A Balance Transfer Or A Personal Loan? 

Balance transfers and personal loans serve different purposes. Before you apply for one, consider your specific needs. 

Choose A Balance Transfer If: 

  • You Can Pay Off The Debt In The Allotted Time – Your total debt can be repaid within the balance transfer credit card’s interest-free introductory period.
  • You Need A Small Loan Amount – Depending on the limit you qualify for and the time you have to repay the loan, one option will be better than the other. Generally, balance transfers are better for smaller loan amounts. 
  • You Can Qualify – To qualify for a balance transfer, you’ll usually need to have good credit and finances. 

Choose A Personal Loan If: 

  • You Can Afford The Loan Payments – Unlike a balance transfer, you can’t make partial payments, you must provide the full payment in order to avoid any penalties. 
  • You Need A Large Loan Amount –  If you need to cover or consolidate a large expense, a personal loan may be better as you can get a longer time frame to repay the loan.
  • You Can Qualify – Your credit and financial profile allow you to qualify for a low-interest rate and favourable terms. 

How To Transfer A Credit Card Balance?

If you currently carry a high-rate credit card balance and wish to transfer it to a balance transfer credit card, your first step is to contact the credit card issuer. You’ll need to provide them with relevant information regarding the balances you want to transfer. 

There are a couple of common ways to request a balance transfer from a credit card provider:

  • Online. If you already have an online account with the financial institution that you’re requesting a balance transfer credit card from, you can make your request by logging into your account. From here, you can supply all the required information, such as the debt you want to move and the account information.
  • Telephone. You can also call the credit card issuer to ask for a balance transfer. As with online requests, you’ll need to provide the required information about the debt you’d like to move.

Balance Transfer vs. Personal Loan FAQs

Can I transfer the balance from my credit card to another credit card?

Transferring the balance of one credit card to another is a common practice for those looking to save on interest and pay down their debt. Choose a credit card that allows balance transfers and has a 0% or low introductory rate for at least 6 months if not a year. 

Do credit card balance transfers affect your credit score?

A balance transfer will not directly affect your credit scores. But, opening a new credit card that requires a credit check may cause your scores to drop by a few points temporarily. On the other hand, paying off your credit debt and keeping your debt-to-credit ratio low can positively affect your scores. 

How to use a credit card balance transfer?

To transfer a balance from one credit card to another, you should start by finding a balance transfer credit card that offers a low introductory rate, preferably 0%. Once you’ve been approved, make sure you understand the fees and calculate if the transfer is worth it. Balance transfers can be requested over the phone, or via your bank’s online portal.

Final Thoughts

There are a lot of factors to consider when choosing between a personal loan and a credit card balance transfer. It’s important to remember that everyone’s debt situation is unique, you need to look at your offers, costs, total debt, and personal preferences among many other factors to determine if balance transfers or personal loans are ideal for you.

Rating of 5/5 based on 2 votes.

Lisa has been working as a personal finance writer for more than a decade, creating unique content that helps to educate Canadian consumers in the realms of real estate, mortgages, investing and financial health. For years, she held her real estate license in Toronto, Ontario before giving it up to pursue writing within this realm and related niches. Lisa is very serious about smart money management and helping others do the same.

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