Debt Consolidation Loan vs. Balance Transfer: What's the Difference?

A debt consolidation loan is a fixed-term personal loan used to pay off multiple debts, combining them into one monthly payment with a fixed interest rate.

A balance transfer, on the other hand, involves moving existing credit card debt to a new card with a low or 0% introductory APR for a set period of time.

Take a look at this breakdown on the key differences, along with the pros and cons of each, so you can figure out what's best for your finances.

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Key Differences Between a Debt Consolidation Loan and a Balance Transfer

What Is a Debt Consolidation Loan?

A debt consolidation loan is a type of personal loan designed to combine multiple high-interest debts into a single loan with a fixed interest rate and repayment term.

How It Works

1. You apply for a loan, an amount between anywhere from $5,000 and up to $100,000.

2. If approved, the lender deposits the funds into your bank account.

3. You use the money to pay off existing debts.

4. You make fixed monthly payments until the loan is repaid.

Common Uses

• Paying off credit cards

• Consolidating medical bills

• Combining personal loans

Where It's Offered

Banks, credit unions and online lenders offer debt consolidation loans.

What Is a Balance Transfer?

A balance transfer involves moving existing credit card debt to a new card with a promotional 0% APR period, usually six to 21 months.

How It Works

1. Apply for a balance transfer credit card.

2. If approved, the new card issuer pays off your old credit card or cards.

3. You repay the debt on the new card over the 0% APR period.

4. After the intro period ends, the regular variable rate APR applies, which could be anywhere between 18% to 29% on average, depending on the card issuer.

Common Uses for Balance Transfers

• Paying off high-interest credit cards

• Avoiding interest while paying down debt

Where They're Offered

Major banks that issue credit cards like Chase, Citi® and Bank of America offer balance transfer cards, as do smaller credit unions.

How Does a Debt Consolidation Loan Work?

1. Check your credit score. Most lenders require good to excellent credit — around 670 and above.

2. Compare lenders. Look for competitive rates and terms.

3. Apply and get approved. Submit personal information, to verify your income and any debts you have.

4. Receive funds and pay off debts. The lender deposits the loan amount into your account and then you can pay off your high-interest loans.

5. Repay over fixed term. You'll typically repay the loan over a set period with fixed monthly payments.

Key Differences From a Balance Transfer

Some debt consolidation lenders offer direct payment to creditors, which skips the need to transfer funds yourself.

You can also consider secured loans, which are loans backed by collateral, like a car or boat, and may offer lower rates. The trade-off is these loans are a bigger risk for you — if you miss a payment, you could lose that collateral.

How Does a Balance Transfer Work?

1. Know your credit score. Most cards require a FICO Score of at least 670 or higher. If your credit isn't great, consider improving it first before applying for a balance transfer card.

2. Compare offers. Do math to compare what a balance transfer will cost you to find the right combination of 0% APR period length and balance transfer fees.

3. Apply for the card. Approval depends on a combination of your credit score and other financial factors including overall debt load, income and other financial factors.

4. Transfer the balances to the new card. The new card issuer pays off your old debts.

5. Pay off the debt before the 0% APR period ends. The goal here is to pay off the balance before the intro offer expires and the card reverts to its ongoing standard APR.

Key Differences From a Loan

• No lump sum cash payout. A balance transfer just shifts existing debt to another lender.

• There's a balance transfer fee, which is typically 3% to 5% of the amount being transferred.

• The card's regular ongoing interest rate resumes after the promo period ends.

Pros and Cons: Debt Consolidation vs. Personal Loan

Debt Consolidation Loan Pros

Debt consolidation has its merits but there are pitfalls to look out for.

• Fixed interest rate. There's no surprises over time as every month you'll pay the same amount towards your loan.

• Structured repayment plan. There's a clear end date for debt freedom.

• Can improve credit score. The less debt you carry, the better your overall credit utilization.

Debt Consolidation Loan Cons

• Requires good credit. Most personal loans for debt consolidation are aimed at those with good or better credit.

• May need collateral. If you're applying for a secured loan, you'll typically have to put up something you own as collateral, which puts it at risk.

• Longer repayment. With a longer runway to pay off your debt comes greater finance charges over time.

Balance Transfer Pros

• 0% APR period. Pay no interest for a set period of time.

• No collateral needed. A balance transfer card is unsecured debt.

• Fast approval. Some issuers give instant decisions.

Balance Transfer Cons

• High APR after intro period. Credit cards are notoriously expensive and rates can exceed 25% APR.

• Balance transfer fee. Most cards charge a fee of between 3% to 5% of the amount transferred.

• Risk of running up new debt. When your original card is paid off, it can be tempting to put expenses on it again.

How To Choose the Right Option for You

How To Apply for a Debt Consolidation Loan or a Balance Transfer

Debt Consolidation Loan Application

You can apply for a debt consolidation loan in just a few steps.

1. Compare the Available Options

Find the one that best fits your profile. Generally, the best rates on a debt consolidation loan are for those with good credit, which is typically a credit score of 670 and higher. Many bank or credit card apps will show you a version of your credit score for free so you can get a general idea of where you stand.

2. Gather the Necessary Documents

When applying for a loan, you'll usually need to show a valid government ID, proof of your income and statements showing the exact amounts of your existing debts.

3. Fill Out the Application

Typically, you'll apply for the loan with a bank, credit union or online lender. Applications at all three can be done online and some banks and credit unions may offer an in-person application process.

4. Wait for Approval

Depending on the lender, it can take anywhere from one to seven business days before hearing back with a decision. If you're approved, depending on the loan and lender, you can access the funds the on the same day that you're approved.

Balance Transfer Application

Applying for a balance transfer card is similar to applying for a debt consolidation loan.

1. Evaluate Your Credit Standing and Debts

The best balance transfer cards are generally accessible to those with good credit. If your credit is poor or fair, you may want to work on improving it first before applying.

2. Gather the Required Documentation

You'll need a valid ID, like a driver's license, proof of income and any existing credit card account numbers you'll looking to transfer a balance from to the new card.

3. Complete the Forms

Most balance transfer card applications can be done online in a few minutes. Like most credit card applications, you're also likely to find out if you're approved within a few seconds of submitting your information.

Occasionally, an issuer may take more time to review your application or require additional documentation.

If your application is denied, by law, you should receive a letter in the mail within 30 days explaining why you were rejected. One common reason for balance transfer card denials is if your existing debts are too high.

Final Verdict: Which Should You Choose?

Pick a debt consolidation loan if:

• You want predictable payments.

• You have good credit.

• You need to consolidate non-credit card debt.

Pick a balance transfer card if:

• You can pay off debt within the 0% APR period.

• You only have credit card debt.

• You want to avoid interest temporarily.

The best choice depends on your timeline, credit score and if you can stay on schedule with your payments. Compare offers from multiple lenders and card issuers to find the most cost-effective solution for your debt.

FAQs

Which is easier to get?

A balance transfer card is often easier to get than a personal loan if you have good or better credit. Just remember that personal loans offer more flexibility in how you use the funds.

Which has lower interest rates?

A credit card with a 0% APR balance transfer has the lowest rate for debt consolidation in the short-term, but once the intro period expires, the regular variable APR will apply. A fixed-rate loan can be a better long-term choice, as your payments will remain the same throughout the life of the loan.

Can I use either student loans or medical debt?

Balance transfers typically only work for existing credit card debt. Personal loans can be used any way you'd like, including towards student loans or medical debt.

How do they affect my credit score?

Applying for a personal loan can cause an initial small dip to your credit score, but longer-term can improve your score by lowering your credit utilization, since you'll have access to more credit. Applying for a balance transfer card will also temporarily decrease your score, but may also have a positive effect long-term, as you'll have access to a greater credit line. With either option, maxing out the limit on a new loan or credit card will negatively affect your score due to high utilization, but paying off the balance will have a positive effect.

Can I switch from one to the other later?

You can apply for a personal loan to pay off the balance on a balance transfer card, although there's no guarantee you'll be approved. It may be possible to transfer the debt you owe on a personal loan to a balance transfer credit card but it pays to read the terms and conditions of any card you apply for to make sure you'll be able to proceed.