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!
|Lender||APR Range||Loan Amount|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Includes AutoPay discount. Important Disclosures for Payoff.
3 Important Disclosures for FreedomPlus.
4 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
5 Important Disclosures for LendingPoint.
6 Important Disclosures for LendingClub.
All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage & history. The APR ranges from 6.16% to 35.89%. For example, you could receive a loan of $6,000 with an interest rate of 7.99% and a 5.00% origination fee of $300 for an APR of 11.51%. In this example, you will receive $5,700 and will make 36 monthly payments of $187.99. The total amount repayable will be $6,767.64. Your APR will be determined based on your credit at time of application. The origination fee ranges from 1% to 6% and the average origination fee is 5.49% as of Q1 2017. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the www.lendingclub.com website. All loans via LendingClub have a minimum repayment term of 36 months or longer.
7 Important Disclosures for Earnest.
8 Important Disclosures for Avant.
* The actual rate and loan amount that a customer qualifies for may vary based on credit determination and other factors. Funds are generally deposited via ACH for delivery next business day if approved by 4:30pm CT Monday-Friday. Avant branded credit products are issued by WebBank, member FDIC.
** Example: A $5,700 loan with an administration fee of 4.75% and an amount financed of $5,429.25, repayable in 36 monthly installments, would have an APR of 29.95% and monthly payments of $230.33
* Important Disclosures for Upgrade Bank.
Upgrade Bank Disclosures
** Accept your loan offer and your funds will be sent to your bank via ACH within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes this transaction. From the time of approval, funds should be available within four (4) business days.
|7.73% – 29.99%||$1,000 - $50,000||Visit Upstart|
|6.26% – 14.87%1||$5,000 - $100,000||Visit SoFi|
|6.99% – 35.97%*||$1,000 - $50,000||Visit Upgrade|
|8.00% – 25.00%2||$5,000 - $35,000||Visit Payoff|
|4.99% – 29.99%3||$10,000 - $35,000||Visit FreedomPlus|
|5.99% – 18.99%4||$5,000 - $50,000||Visit Citizens|
|15.49% – 34.49%5||$2,000 - $25,000||Visit LendingPoint|
|6.16% – 35.89%6||$1,000 - $40,000||Visit LendingClub|
|6.99% – 18.24%7||$5,000 - $75,000||Visit Earnest|
|9.95% – 35.99%8||$2,000 - $35,000||Visit Avant|