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Balance Transfer Vs. Personal Loan: Which One Makes Sense For You?

9-Minute ReadOctober 06, 2021


Without meaning to, you’ve found yourself overwhelmed and underwater in credit card debt. It can happen to the best of us. Fortunately, there are a number of ways to get out of credit card debt – it’s all about finding the best solution for you and your situation.

Balance transfers and personal loans are two options for debt consolidation, and both have their benefits and drawbacks when compared to each other. The article below breaks down their differences, and may help you decide which option to go with. Let’s take a look.

What Is A Balance Transfer Card?

With a balance transfer, you can take the balance you owe on one or more credit cards and move it all over to a brand new card. As many credit companies offer a 0% annual percentage rate (APR) introductory period, balance transfers can be an ideal solution for those in debt. This interest-free promotional period gives borrowers the opportunity to pay back all of their debt without worrying about high-interest charges.

What Are Balance Transfers Used For?

As a credit card’s 0% introductory period only lasts for a certain amount of time, typically 12 – 18 months, balance transfers are best used to consolidate credit card debt that doesn’t total more than $20,000. Anything higher than that could be difficult to pay off in only a year-and-a-half. Otherwise, a balance transfer card could be perfect for getting all of your debt in one place and paying it back interest-free.

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What Is A Personal Loan?

A personal loan is a lump sum that a borrower can use to pay for almost anything. Some people will use a personal loan to consolidate their overwhelming debt, and pay it all back with lower interest rates than they’d owe a credit card company.

Personal loans can provide some comfort to borrowers attempting to pay off debt by offering fixed-rate monthly payments, assuring them that the monthly amount they owe will not change, as well as the promise of an end date for their repayment period.

What Are Personal Loans Used For?

There are few limits to what you can do with a personal loan. The “personal” in “personal loan” means that what you spend it on is your business.

The amount you can borrow for a personal loan typically caps at $45,000 – in certain cases, it can be up to $100,000 – so they’re generally used to pay for bigger expenses that would take longer to pay off.

Interest rates and loan terms depend largely on your credit score and debt-to-income ratio (DTI).

Debt Consolidation: Should You Get A Balance Transfer Or A Personal Loan?

While both a personal loan and a balance transfer credit card are viable options for debt consolidation, they involve differing requirements, limits and fees that may affect which one is best for your situation.

Let’s take a look at their differences.

Credit Requirements

Some common ground between balance transfer credit cards and personal loans is that they typically require a good or excellent credit score to qualify.

It’s unlikely you’d qualify for a balance transfer card unless you have a credit score of 670 or higher. A lower credit score may get you a secured loan balance transfer without a 0% APR introductory period. Additionally, the secured card will require a cash deposit as collateral.

With personal loans, a higher credit score will qualify you for more advantageous rates and terms. If your score is 649 or lower, you could see less-than-favorable interest rates, but you may still get a loan all the same. If those rates are lower than what you’d face paying back your credit card debt, you could still be saving yourself some money.

Interest Rates

As discussed above, the introductory period for most balance transfer cards charges 0% APR for a set amount of time. If that period ends before you’ve paid back your debt, though, you’ll be hit with the higher interest rates generally associated with credit cards, and possibly wind up back where you started under a mountain of debt.

Interest rates for personal loans come down to how good your credit score is. Also a factor is how low your DTI is – you wouldn’t want that ratio higher than 36%. A “good” credit score of 650 or higher can net you decent rates, but better deals come with higher scores. Personal loans typically have fixed-rate repayment plans, too, so your monthly payment will consistently be for the same amount.

Credit Limits

How much you’re able to borrow can be the biggest tell for which option you should go with.

Balance transfers are better used for smaller debts that could be paid off in a short amount of time – nothing larger than $20,000, if you want to finish paying within the introductory period. Otherwise, a balance transfer doesn’t necessarily have a cap, and really depends on how much you’re transferring over.

Personal loan lenders generally stop at $45,000, and in certain cases may lend up to $100,000 to borrowers. With such a larger amount available, personal loans would be the way to go if you’re in substantial debt.

Repayment Periods

Balance transfer credit cards offer relatively flexible repayment schedules, but interest rates play a huge factor in how long you should take to repay your loan. Introductory periods are just that – “introductory.” After 12 – 18 months, that 0% APR is replaced by high-interest charges typical of most credit cards. So, while technically flexible, you should think of your balance transfer repayment period as the length of the introductory period in order to avoid those high interest rates.

Personal loan terms are contingent on your creditworthiness, but are often shorter and at fixed rates. This can be good for borrowers, as they won’t be locked in to paying off a debt for years and years, and they’ll know exactly what they owe every monthly payment. Even with interest, a borrower will see few surprises down the line while repaying their loan.

Associated Fees

Most balance transfer cards require a one-time fee paid to transfer your balance amount over. This can cost 3 – 5% of your total amount. Let’s say, then, that you want to transfer a total balance of $6,000 to the new card. That would likely equal a fee of $180 – $300 on top of your debt. Some cards may also charge annual fees.

Many personal loans come with a one-time origination fee equal to 1 – 10% of the total amount borrowed. An origination fee covers the costs for lenders to process and deliver a loan. The origination fee is often taken out of the approved loan amount, rather than charged separately.

An origination fee from Rocket Loans® typically amounts to 1 – 6% of your approved amount.

Effect On Credit Score

Maxing out a credit card can negatively impact your credit score, and transferring a large balance onto a new card could push your credit utilization close to the edge. Opening new credit accounts can also bring your score down, especially if you get into a habit of consistently transferring debt onto a new card.

Approval for a personal loan involves a hard inquiry, which can lower your credit score by about 10 points, regardless if you’re approved or not. As that part of the process is unavoidable, you’ll just need to make sure you keep up on your monthly payments to build up your credit again.

Application Process

Fortunately, both a balance transfer and personal loan involve relatively straightforward and quick application processes.

Getting a balance transfer credit card starts with you researching and comparing the best cards for your situation and needs. Once you’ve decided on one, you can apply online following the website or mobile app’s instructions, or call the card company and speak with an agent. To apply, you’ll need to provide the agent with some information regarding the debt you want to transfer, then consent to a credit check. If approved, your card issuer will pay off your old debt for the amount you borrowed, and you’ll see that balance transferred into your account.

The application process for a personal loan begins with a prequalified from one or more lenders you’re interested in working with. Your prequalified will inform you of what rates and terms you qualify for – you should use this to decide what lender is offering you the best deal. In addition to a soft credit check, a prequalified requires that you submit personal information including your name, address, date of birth, Social Security number and income data.

When you choose a lender and submit a full application, you’ll provide information about your bank account, bank statements, pay stubs, tax forms and your driver’s license or other personal identification, followed by a hard inquiry. A personal loan doesn’t take long, generally, to get approved or rejected. You may hear back in 1 – 7 business days, and might even receive your funds within that time, too.

Rocket Loans offers same-day financing on personal loans, and can potentially approve and issue funds the same day you apply.*

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Final Thoughts: Balance Transfer Or Personal Loan?

If debt consolidation sounds like your way out of crushing debt, you have options to choose from. Balance transfer cards and personal loans accomplish the same goal through different means, and each with their own benefits and drawbacks. Whatever route you take to escape your debt, make sure it’s the best one for your situation.

Disclaimer: Same Day Funding available for clients completing the loan process and signing the Promissory Note by 1:00PM ET on a business day. Also note, the ACH credit will be submitted to your bank the same business day. This may result in same day funding, but results may vary and your bank may have rules that limit our ability to credit your account. We are not responsible for delays which may occur due to incorrect routing number, account number, or errors of your financial institution.