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If you want to consolidate debt, using a personal loan or balance transfer card are two popular options that could help lower your overall interest rate and pay down debt quicker.
A personal loan works better in some situations, while a balance transfer works better in others. For example, a personal loan is generally the better option if you’re consolidating debt that’ll take longer than two years to pay off.
Below is a look at how each option works, including their pros and cons, to help you determine which one — if any — might be right for you.
In this post:
- Debt consolidation vs. balance transfer cards
- Should I consolidate or get a balance transfer credit card?
Debt consolidation loan vs. balance transfer cards
Debt consolidation involves taking out a new loan to pay off existing debt — usually to lower your overall interest rate. Consolidating debt allows you to combine multiple payments into a single payment, which can make paying it off much easier.
If you receive a lower interest rate, debt consolidation can help you save thousands of dollars in interest and pay off your debt faster.
You can consolidate with either a personal loan or a balance transfer.
Here’s a look at how the two compare:
|Personal Loan||Balance Transfer Card|
|Amount of debt||Larger debt amounts||Smaller debt amounts|
|Type of debt||Multiple types of debt, including credit cards||Potentially only credit card debt, depending on issuer|
|Application requirements||Poor to good credit depending on the lender||Good to excellent credit required|
|Repayment terms||Typically one to seven years||Promotional transfer period generally lasts from six to 21 months
|Fees||May have to pay origination fees, application fees, or prepayment penalties||Balance transfer fees generally ranges from 3% to 5% of transfer amount|
What is a personal loan for debt consolidation?
A personal loan for debt consolidation, or a debt consolidation loan, is a lump sum, fixed-rate loan that a borrower can use to consolidate several types of debts, such as credit cards and other personal loans.
Personal loans are usually unsecured, meaning you don’t have to pledge any collateral — an asset the lender can take if you fail to repay the loan. Once you consolidate your debt with the loan, you repay it in fixed monthly installments.
If you qualify for a lower rate than your existing debt and choose a similar repayment term, it can save you hundreds of dollars in interest. You can also choose a longer repayment term if you prefer a lower monthly payment, but you’ll pay more interest over the life of the loan.
Best for: A personal loan may work best if you need to consolidate credit card debt, unsecured debt, and larger debts that take longer than two years to pay off.
The personal loan companies in the table below compete for your business through Credible. You can request rates from all of these partner lenders by filling out just one form (instead of one form for each) and without affecting your credit score.
|Lender||Fixed rates||Loan amounts||Check rates|
|9.95% - 35.99% APR||$2,000 to $35,000**|
|11.79% - 20.84% APR||$10,000 to $50,000|
|8.99% - 35.99% APR||$2,000 to $50,000|
|7.99% - 24.99% APR|
$2,500 - $40,000
|11.72% - 24.67% APR||$3,000 to $40,000|
|9.57% - 35.99% APR||$1,000 to $40,000|
|7.49% - 25.49% APR with autopay||$5,000 to $100,000|
|18.0% - 35.99% APR||$1,500 to $20,000|
|8.49% - 17.99% APR||$600 to $50,000 |
(depending on loan term)
|14.3% - 35.99% APR||$3,500 to $40,000|
|8.99% - 25.81% APR10||$5,000 to $100,000|
|11.69% - 35.99% APR7||$1,000 to $50,000|
|8.49% - 35.99% APR||$1,000 to $50,000|
|6.4% - 35.99% APR4||$1,000 to $50,0005|
What is a balance transfer card?
A balance transfer credit card allows you to transfer debt from one credit card to another card with a different credit card issuer. Once you transfer the debt, you’re only responsible for making one payment to the new card.
Many balance transfer credit cards come with 0% promotional periods that can last up to 21 months. If you pay the balance off in full before the promotional period ends, you can avoid paying interest. But you’ll pay interest on any remaining balance at the card’s standard annual percentage rate (APR).
Best for: A balance transfer may be a good option if you’re only consolidating credit card debts though some issuers may allow you to use a balance transfer to pay off personal loan or other debt.
Should I consolidate or get a balance transfer card?
When deciding between a personal loan and a balance transfer credit card, you should consider the following factors.
- Types of debt: If you need to consolidate multiple types of debt, a personal loan would work best, as it’s likely more flexible. But a balance transfer could be a better option if you only need to transfer credit card debt, as some issuers restrict balance transfers to paying off credit card (not other forms of) debt.
- How much it costs: Compare the cost of each option to see which one is the cheapest. You can use our personal loan calculator to estimate your total borrowing costs.
- Minimum credit score requirements: Lenders typically reserve their best rates for borrowers with good to excellent credit scores (670 and above). You can qualify for a debt consolidation loan with bad credit, but balance transfer cards generally require good to excellent credit.
Pros and cons of a debt consolidation loan
Although a personal loan can be good for debt consolidation, it’s not right for everyone. Before choosing this option, weigh the pros against the cons.
- Personal loan rates are often lower than credit card rates. The average personal loan rate is often lower than the average credit card rate. For example, the average interest rate for a 24-month personal loan was 11.21% in November 2022, according to the Federal Reserve. By comparison, the average credit card accounts assessed interest was 20.40%.
- Consolidate multiple types of debts. A personal loan can be used to consolidate multiple types of debt, unlike a balance transfer credit card.
- One monthly payment. By consolidating your loans into one, you can manage your debt by only having one payment.
- Potentially high interest rates. If you have bad credit, you may find it challenging to qualify for a lower interest rate without a cosigner.
- Interest accrues immediately. As soon as you consolidate your debts and open the new loan, interest accrues at the standard APR.
- Fees. Some lenders charge origination fees as high as 10% of the loan amount, which can significantly increase your borrowing costs.
Pros and cons of a balance transfer credit card
Similar to personal loans, balance transfer credit cards also come with pros and cons.
- Low-interest promotional periods. Many balance transfer cards come with no or low-interest promotional periods. If you pay off the balance in full before the promotional period expires, you can save a lot of interest.
- Streamline your credit card debt payments. A balance transfer credit card can help you combine your credit card debt into a single monthly payment, which may be easier to manage than juggling multiple payments.
- Improve your credit utilization ratio. Once your debt is transferred to the new card, your credit utilization may improve along with your credit score.
- Good to excellent credit needed. To qualify for most balance transfer credit cards, you’ll need good to excellent credit, which is often defined as a FICO score 670 or higher.
- You can only consolidate credit card debt. Unlike a personal loan, you can only consolidate credit card debt with a balance transfer card.
- You should aim to pay the debt off within the 0% APR promotional period. If you’re not able to pay off your debt on the new balance transfer card within the promotional period, the interest will accrue at the standard APR, leaving you with a hefty interest charge.
Keep in mind that you can also use both to consolidate your debt. Whichever option you choose, ensure you have a solid plan to kick your debt to the curb.