Balance Transfer vs. Personal Loan: What’s the Difference?

Balance transfers and personal loans both help you use new credit to pay off higher-interest debt. But they’re very different products, and each has its own benefits and risks. This guide explains how both options work to help you decide which is the better choice for you.

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Quick Take

A balance transfer is your best option if you can pay off the balance while the promotional rate is in effect. Otherwise, a personal loan might be better, especially if you qualify for a low interest rate.

• Balance transfers typically have 0% introductory annual percentage rates (APRs) to give you a strong head start in paying off the debt, then switch to a standard variable APR.

• Personal loans usually have fixed rates, which keep your payments consistent and easier to budget.

• Balance transfers and personal loans often charge fees in addition to interest.

• You can apply for a balance transfer card in a few minutes. Personal loan applications are longer and require personal identification and income documentation.

Balance Transfer vs. Personal Loan: Key Differences

Balance transfers and personal loans can serve similar purposes, but they’re significantly different in terms of fees, credit limits, funding time and how APRs are applied.

How Does a Balance Transfer Work?

A balance transfer uses a credit card with a 0% promotional APR to pay off higher-interest credit accounts. You can transfer up to the balance transfer credit limit and pay 0% interest during the promotional period, which usually lasts for 12 to 21 months.

Here’s how it works.

• You apply and are approved for a balance transfer credit card.

• You request balance transfers to pay down or pay off your existing credit accounts.

• The balance transfer card pays those accounts and charges you a balance transfer fee.

• You must pay at least the minimum payment due during the promotional period, but those payments might not pay the full balance before the promotion ends.

• After the promotional period ends, you’ll pay the standard APR on any remaining balance.

How Does a Personal Loan Work?

A personal loan pays a lump sum, which you can use to consolidate credit card debt or finance a major expense, and charges a fixed rate of interest on the money. You repay the loan in monthly installments over the loan term, which usually lasts 24 to 84 months.

Here’s how it works.

• You fill out an application and submit any information and documentation the bank or lender requests so it can evaluate your creditworthiness and ability to repay the loan.

• The lender notifies you when it has approved the loan, and it discloses important information such as your fixed APR, loan fees and payment amount.

• Once you’ve accepted the loan, the lender transfers the funds to your bank account.

• You repay the loan in equal monthly installments over the loan term.

Balance Transfer vs. Personal Loan Cost Examples

Cost could be a deciding factor when you’re trying to decide between a balance transfer and a personal loan.

Here's an example:

You have $10,000 in credit card debt at a 21% APR and are considering:

• A balance transfer card with a 0% APR for 15 months, followed by a 24% APR

• A 48-month personal loan at 12% APR

Personal Loan

• Monthly payment: $263

• Total cost: $12,640

• Interest paid: $2,460

Balance Transfer

• Pay $263 per month for 15 months = $3,945 paid at 0% APR

• Remaining balance: $6,055 at 24% APR

• If you only make minimum payments after the promo period, it could take over 14 years to repay. The total interest would be about $5,830.

Bottom Line

• If you can pay off most of the balance during the 0% APR period, a balance transfer can save money

• If not, a lower APR personal loan may be the better option.

Note: This example excludes balance transfer and personal loan fees.

Common Pitfalls To Avoid

Balance transfers and personal loans both have risks to be aware of.

Balance Transfer Risks

These risks could offset the benefits of a balance transfer.

• The minimum payment can suddenly increase once the standard APR takes effect.

• You might forfeit the promotional rate if you make a late payment.

• Card issuers sometimes apply payments to transferred balances before balances from new purchases. If that happens, interest could accrue at the standard rate on your new purchases, with no grace period, until your transferred balance has been repaid.

• Your credit limit might not be high enough to repay all your current accounts.

• Reusing credit cards after you’ve transferred their balances could land you deeper in debt than when you started.

Personal Loan Risks

Personal loans can be risky if you don’t know what to watch for.

• Origination fees can be as high as 10%. The fee is added to your loan balance, so you’ll pay interest on it.

• Longer loan terms keep payments affordable and might get you a lower origination fee. But they increase the amount of interest you’ll pay, possibly eliminating any potential benefit of consolidating debt.

• Prepayment penalties can make it difficult to reduce interest payments by paying the loan off early.

• The lender might not disclose fee amounts until you’ve applied. In that case, you can’t evaluate the loan costs until after the lender has already pulled your credit.

• The rate you’re offered could be several times higher than the lowest posted rate.

Can You Combine Both Options?

Theoretically, you can combine a balance transfer with a personal loan. Doing so might allow you to meet two financial goals at once — pay off debt with the balance transfer, and pay an emergency expense with the personal loan, for example.

However, you’d need excellent credit to simultaneously qualify for two new credit accounts with competitive APRs and high enough credit limits to serve your purposes. You’ll likely pay fees for each — transfer fees for the balance transfer card, and origination and application fees for the personal loan — and could burden yourself with overwhelming debt.

How Do You Apply for Each Option?

Research your options carefully by weighing the pros and cons of personal loans vs. balance transfers, then follow the instructions below to apply for the card or loan that best meets your needs.

How To Apply for a Balance Transfer

1. Gather your Social Security number, address and income documents.

2. Make a list of the accounts you want to pay off, with their balances.

3. Start an application on the card issuer’s website, or call to work with a representative.

4. Enter information as prompted, including information about the balances.

5. After your application is accepted, watch for the transfers to go through.

How To Apply for a Personal Loan

1. Gather the information and documents you’ll need for your application: photo ID, full name, Social Security number, proof of address and other financial information such as the type of personal loan and how you plan to use it.

2. Note the amount you want to borrow and the number of the account you want to receive the funds.

3. Fill out the application on the lender’s website, over the phone or at a branch office.

4. Follow the instructions for submitting your income verification documents.

5. Once your loan has been approved, review the disclosures carefully.

6. Accept the loan by signing and returning the loan documents.

7. Watch for the funds to arrive in your bank account.

Key Takeaways

Remember these key points when choosing between a balance transfer or a personal loan.

• A balance transfer card has a revolving line of credit. A personal loan pays out a single lump sum.

• Balance transfer cards typically have a 0% introductory APR, followed by a variable standard APR. Personal loans usually have a fixed rate.

• Both options typically have fees.

• Personal loans are repaid over a pre-determined loan term, such as 24, 36 or 48 months. Balance transfer credit lines have no specific payoff date.

• Personal loan applications require more documentation than applications for balance transfers.

• Balance transfer is usually the better choice if you can repay the balance in full during the promotional APR period. Otherwise, a personal loan might be cheaper.

Terms To Know

• APR: The annual cost of a loan, including interest and fees.

• Balance transfer fee: The fee you pay on balances you transfer to a balance transfer card, usually totaling 3% to 5% of the transfer amount.

• Interest rate: The percentage of the loan amount charged by the credit card company or lender

• Minimum payment: The minimum amount you must pay on a credit card, usually equal to 1% to 4% of the balance.

• Origination fee: A percentage of the loan amount charged by the lender to originate, or create, the loan.

• Term: The number of months (or years) you have to repay a loan.

Balance Transfer vs. Personal Loan FAQs

Learn more about balance transfers and personal loans with these frequently asked questions.

Which is better: a balance transfer or a personal loan?

A balance transfer is usually better if you can repay the balance during the promotional APR period. Otherwise, a personal loan might be a better choice.

Can you transfer balances within the same bank?

In most cases, no. You’ll need to apply for a card from a different issuer.

Can you transfer non-credit card debt?

Yes. You can transfer balances from student loans, car loans and, in some cases, even personal loans.

Do personal loans have fees?

Many do, especially for borrowers who don’t have exceptional credit. The major one to watch for is the origination fee, which can equal 1% to 10% of the loan amount.

How do balance transfers affect a credit score?

Balance transfers can have both positive and negative effects if you take out a new card to do them. The credit check can reduce your credit score slightly, as can a new account that reduces the average age of your credit accounts. However, increasing your available credit and paying the debt off faster, thanks to the 0% introductory APR, can help your score.

Sarah Silbert contributed to the reporting for this article.

Photo Credit: damircudic / Getty Images