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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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 and charges a fixed rate of interest on the money you borrow. You can use a personal loan to consolidate debt or finance a major expense, for example some people will even use a personal loan to pay off credit cards. You'll 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: $12,624

• Interest paid: $2,624

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.

Comparing Risks on Balance Transfers vs. Personal Loans

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 over the life of the loan and possibly eliminate 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. Plus you could burden yourself with overwhelming debt.

How Do You Apply for Each Option?

Research your options carefully to get to get an idea of the various balance transfer cards vs. consolidation loans you could qualify for, then follow the instructions below to apply for product 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.

The Bottom Line

A balance transfer and a personal loan can both help you tackle high-interest debt, but they fit different situations. A balance transfer works best if you have strong credit and can pay off your balance during the 0% intro APR window. Just watch for the transfer fee and the regular rate that kicks in later.

A personal loan gives you a fixed rate, a set payoff date and one steady payment, which can make larger balances easier to manage over time.

If you're looking for refinancing options, make sure to compare a debt consolidation loan vs. balance transfer or even a personal loan vs. credit card.

Key Terms

• Balance transfer: The process of moving existing credit card debt to a new card, typically one with a 0% introductory APR, to reduce or pause interest while you pay down what you owe.

• Introductory APR: A temporary promotional interest rate, often 0%, offered for a set period of typically 12 to 21 months, after which the account reverts to a higher standard variable rate.

• Personal loan: A lump-sum installment loan you repay in fixed monthly payments over a set term, often used for debt consolidation or large expenses.

• Fixed interest rate: An interest rate that stays the same for the life of the loan, keeping your monthly payment amount consistent and easier to budget.

• Origination fee: A one-time upfront charge some lenders deduct from your loan proceeds before you receive funds, typically 1% to 10% of the loan amount.

• Revolving credit: A type of credit line, like a credit card, that lets you borrow, repay and borrow again up to your limit, with no fixed payoff date.

• Debt consolidation: Using a new loan or credit product to combine multiple existing debts into a single payment, ideally at a lower overall interest rate.

Sources

• Consumer Financial Protection Bureau: What is a personal installment loan?

• Consumer Financial Protection Bureau: What is a credit card interest rate? What does APR mean?

Sarah Silbert contributed to the reporting for this article.

Photo Credit: damircudic / Getty Images

Parts of this article were created with AI assistance. MoneyLion editors reviewed, fact-checked and edited the final version and are responsible for its accuracy.