Personal Loans vs. Balance Transfers: Which Is Best for Consolidating Your Debt?

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When it comes to debt consolidation, there’s no one-size-fits-all approach.

However, taking out a personal loan and utilizing a credit card balance transfer often are the most popular methods for digging your way out of debt.

But how do you know which one to choose?

Here’s what you need to know about each method, plus a few relevant scenarios so that you can pick the best contender in the debate over personal loans versus balance transfers.

Personal loans vs. balance transfers

Learn more about the process of the two debt consolidation methods so you can choose the right one for your situation.

How a personal loan helps consolidate debt

If you have loans, it might seem weird to borrow more money from an online lender, bank, or credit union to pay off your existing debt.

But, an unsecured personal loan in the form of a debt consolidation loan is a helpful solution in many cases. That’s because it allows you to pay off multiple types of loans with different monthly payments and then start fresh with a single monthly payment.

You can benefit from debt consolidation via a personal loan if you have the credit history (or a qualified cosigner) to score a low, fixed interest rate without posting collateral.

Let’s say you owe $5,000 on one credit card and $5,000 on another, both with an interest rate of 20.00%. You’re able to pay $125 a month on each card for a total of $250 per month.

If you take out a $10,000 personal loan with a 10.00% interest rate and a 3-year repayment term, you’re looking at $4,884 in lifetime savings. That’s because your total balance paid is reduced from $16,500 to $11,616 since you’re paying less interest on a personal loan with a much lower APR. However, this would mean making a higher monthly payment of $323 on the debt.

Curious to see how much you could save? Use our credit card consolidation calculator to plug in your information and find out how much you could enjoy in lifetime savings.

How a balance transfer helps consolidate debt

In a credit card balance transfer, you move your credit card debt from one card to another card with a lower APR so that you can save on interest charges paid. Many consumers use this strategy while repaying credit card debt.

Credit card companies recognize this need, so they offer cards that typically come with yearlong promotional APRs of 0%. So for example, if you open a new credit card and pay off your existing higher-interest debt within 12 months, your balance wouldn’t incur additional interest, and you could save a considerable amount of money.

However, once the introductory APR expires, your credit card interest rate will go up. So, this debt consolidation strategy is risky if you can’t handle a fast payoff.

Like some personal loans, balance transfers on credit cards could come with fees, including an annual membership-style cost. If you went this route, you’d want to shop around for the best no-fee balance transfer cards.

Which debt consolidation strategies work best?

It’s easier to picture which method wins in the debate over personal loans versus balance transfers when you consider a specific borrowing situation. Here are five situations in which one debt consolidation strategy beats the other.

Scenario 1: You can afford to repay the debt within a year

Winner: Balance transfer

Most borrowers would prefer a 0% APR over a typical interest rate of 5.00% to 35.00%. But they may not be able to afford to repay their debt within a year, which is the typical promotional period of balance transfer credit cards.

To gauge your fit, calculate the monthly payment required to repay the new balance transfer card debt before that promotional APR turns into a double-digit rate. Then look at your budget to make sure you can afford that monthly payment.

Scenario 2: You want a lower monthly payment (and longer repayment term)

Winner: Personal loan

Say you couldn’t pay off your debt within a year, even without interest accumulating, or you need to lower your current monthly payments. In these cases, a personal loan is the better option.

Loans terms typically span two to five years. By stretching out your repayment, you’ll pay more interest over the long haul, but that could be a worthwhile trade-off if it means you’ll be able to afford your monthly dues.

To help you decide if this is the right path, use our personal loan calculator to estimate your payments for each possible repayment term.

Scenario 3: You have excellent credit (or a cosigner who does)

Winner: Personal loan

One of the biggest perks of using personal loans for debt consolidation is you could score a lower interest rate than you could on an average credit card that doesn’t offer a 0% introductory APR.

The catch is you must have strong credit (or have a cosigner who does) to receive these lower rates.

If you lack a cosigner or strong credit, you could check out some reputable bad-credit personal loan companies, but you’re less likely to be quoted low fixed rates.

Scenario 4: You want to consolidate a variety of debt

Winner: Personal loan

If you’re attempting to consolidate different kinds of debt, a personal loan might be your only option. That’s because some balance transfer credit cards don’t allow you to move every type of debt to your new card. These exceptions could include student loans, payday loans, and auto loans.

With personal loans, on the other hand, you could pay off almost all your creditors as needed. That’s because your lender deposits your loan amount directly into your bank account, which you can then access to pay off your loans.

Scenario 5: You have a high amount of debt

Winner: Personal loan

There’s no guarantee that your personal loan or balance transfer amount could cover your entire debt. But you likely would have a better shot of consolidating it in one shot via a personal loan.

Top-rated personal loan companies have maximum borrowing amounts — take Citizens Bank ($50,000), Earnest ($75,000), and SoFi ($100,000), for example — that likely would eclipse your balance transfer card’s credit limit. In fact, the average credit line of subprime borrowers in 2017 was $33,371, according to Experian.

If this is the only issue stopping you from opting for the balance transfer strategy, explain the situation to the credit card issuer. You might be able to negotiate a higher credit limit.

Personal loans vs. balance transfers: Which is right for you?

It’s more likely that you fit into more than one of the five scenarios listed above.

Maybe you could afford a one-year payoff on a balance transfer, for example, but have too much and too many different types of debt to transfer.

Or you might prefer the longer, less-risky repayment process of a personal loan but don’t have the credit history or cosigner to make it work.

If you still are confused while trying to figure out which debt consolidation strategy works best for you, don’t hesitate to drop us a line for personalized guidance.

Interested in a personal loan?

Here are the top personal loan lenders of 2018!
LenderRates (APR)Loan Amount 
1 Includes AutoPay discount. Important Disclosures for SoFi.

SoFi Disclosures

  1. Personal LoansFixed rates from 6.58% APR to 14.87% APR (with AutoPay). Variable rates from 6.275% APR to 12.575% APR (with AutoPay). SoFi rate ranges are current as of July 16, 2018 and are subject to change without notice. Not all rates and amounts available in all states. See Personal Loan eligibility details. Not all applicants qualify for the lowest rate. If approved for a loan, to qualify for the lowest rate, you must have a responsible financial history and meet other conditions. Your actual rate will be within the range of rates listed above and will depend on a variety of factors, including evaluation of your credit worthiness, years of professional experience, income and other factors. See APR examples and terms. Interest rates on variable rate loans are capped at 14.95%. Lowest variable rate of 6.275% APR assumes current 1-month LIBOR rate of 2.10% plus 4.175% margin minus 0.25% AutoPay discount. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account.
  2. Terms and Conditions Apply: SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi’s underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Financing Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (www.nmlsconsumeraccess.org)

2 Important Disclosures for Citizens Bank.

Citizens Bank Disclosures

  • Personal Loan Rate DisclosureFixed interest rates from 6.49% – 19.49% (6.49% – 19.49% APR) based on applicable terms. Lowest rates range from 5.99%-18.99% (5.99%-18.99% APR), are for eligible applicants, require a 3-year repayment term, and include our Loyalty and Automatic Payment Discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
  1. Loyalty Discount: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower has a qualifying account in existence with us at the time the borrower has submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, student loans or other personal loans owned by Citizens Bank, N.A. Please note, our checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI and VT. This discount will be reflected in the interest rate and Annual Percentage Rate (APR) disclosed in the Truth-In-Lending Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan, and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
  2. Automatic Payment Discount: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their Citizens Bank Personal Loan during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account two or more times within any 12-month period, the borrower will no longer be eligible for this discount.

* Important Disclosures for Upgrade Bank.

Upgrade Bank Disclosures

  • Personal Loan Rate DisclosureFixed interest rates from 6.49% – 19.49% (6.49% – 19.49% APR) based on applicable terms. Lowest rates range from 5.99%-18.99% (5.99%-18.99% APR), are for eligible applicants, require a 3-year repayment term, and include our Loyalty and Automatic Payment Discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
  1. Loyalty Discount: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower has a qualifying account in existence with us at the time the borrower has submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, student loans or other personal loans owned by Citizens Bank, N.A. Please note, our checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI and VT. This discount will be reflected in the interest rate and Annual Percentage Rate (APR) disclosed in the Truth-In-Lending Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan, and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
  2. Automatic Payment Discount: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their Citizens Bank Personal Loan during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account two or more times within any 12-month period, the borrower will no longer be eligible for this discount.
7.73% – 29.99%$1,000 - $50,000
Check rate nowon SLH's secure site
6.28% – 14.87%1$5,000 - $100,000
Check rate nowon SLH's secure site
6.87% – 35.97%*$1,000 - $50,000Visit Upgrade
8.00% – 25.00%$5,000 - $35,000
Check rate nowon SLH's secure site
4.99% – 29.99%$10,000 - $35,000Visit FreedomPlus
5.99% – 18.99%2$5,000 - $50,000Visit Citizens
15.49% – 34.49%$2,000 - $25,000Visit LendingPoint
5.99% – 35.89%$1,000 - $40,000Visit LendingClub
5.49% – 18.24%$5,000 - $75,000Visit Earnest
9.95% – 35.99%$2,000 - $35,000Visit Avant
Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality and will make a positive impact in your life. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print understand what you are buying, and consult a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time. Please do your homework and let us know if you have any questions or concerns.