Balance Transfer vs. Personal Loan: What’s the Difference?

A balance transfer and a personal loan both usually involve unsecured debt, but the purpose of each is different. A balance transfer usually works by moving a balance from one creditor to another, typically a credit card. A personal loan is a new debt that can be used for a number of purposes.

Key Takeaways

A balance transfer is often used to move your debt account from one creditor to another, usually in an effort to get a lower interest rate.
A personal loan is new debt that can be used for various purposes, including debt consolidation or new purchases.
Both a balance transfer and a personal loan are often unsecured loans.

Balance Transfer

A balance transfer takes place when you move a debt account balance from one creditor to another. For example, you might decide to transfer your debt from a credit card with a high interest rate to one with a lower interest rate—perhaps in a 0% balance transfer. In some cases, it’s also possible to transfer multiple smaller balances from other debt accounts.

Uses

Often, a balance transfer is used to reduce the interest rate on a debt. Paying a high rate of interest can slow down your efforts to pay off your debt, as more of your payment goes toward interest charges. With a lower interest rate, you have the potential to reduce how much you pay overall when repaying the debt and perhaps get out of debt faster.

In many cases, a balance transfer involves moving a debt to a credit card offering a promotional interest rate. You might be able to take a high-rate installment loan balance or the balance from another credit card and move it to the credit card, lowering the interest rate you’re paying.

Requirements

In general, you need to meet the criteria to qualify for the balance transfer offer from the credit card. Depending on the situation, you might need good to excellent credit in order to be approved for the balance transfer offer.

Additionally, you might need to have a relatively small loan balance to complete the transfer. If you don’t qualify for a high credit limit on the target credit card, there might not be enough room to transfer your other balances to a single card.

Pros

Potentially reduce the interest rate on the debt
Combine multiple small debts into one balance on a single card
Potentially pay off the debt faster, since more of the payment goes toward reducing the principal

Cons

Low interest rates are generally available for a limited time before the rate rises
The available credit limit might not be high enough to transfer the entire balance of your debt
Credit card balance transfer fees can be as high as 5%

Personal Loans

A personal loan, rather than being a way to shift your debt to a new creditor, is a new debt. You can use a personal loan to consolidate your debts, getting them in one place, and potentially see a lower interest rate. For some, a personal loan can result in lower monthly payments and help pay off the debt faster.

Uses

In addition to debt consolidation, a personal loan can be used for other purposes. It’s possible to use the funds to make a large purchase or cover emergency expenses. The funds from a personal loan are generally more flexible than a balance transfer.

Requirements

It’s usually possible to get a personal loan with credit ranging from fair to excellent. The better your credit history and score, the more likely you are to get a lower interest rate. However, the credit requirements are often more restrictive. Additionally, you might be able to receive a higher dollar amount as a loan.

Pros

Choose from a variety of loan terms
Borrow larger amounts for various purposes, including debt consolidation
Some lenders provide funds as soon as the following business day

Cons

A loan origination fee might be charged
Borrowers don’t have access to a 0% annual percentage rate (APR) option
There is a set payment plan that you have to stick to

	Balance Transfer	Personal Loan
How to Request	Online, over the phone, or in person	Online, over the phone, or in person
Uses	Get a lower interest rate on debt you can pay off during the promotional period	Consolidate a larger amount of debt, make large purchases, or pay emergency expenses
Interest Rates	0% APR for a limited period of time	Often 3.99% to 35.99%
Amount Limit	The credit card’s limit	Up to $40,000 or more
Fees	Balance transfer fees	Origination fees and potential prepayment fees
Payment Schedule	Make minimum payments based on the balance or attempt to pay off the debt before the 0% APR expires	Fixed payments during the loan term
Credit Requirements	Usually need good to excellent credit	Possible to get a loan with fair to excellent credit
Impact on Credit Score	High impact as you make on-time payments and pay down debt on a revolving account	Can provide a positive impact through credit mix and on-time payments

Which One Should I Use?

Deciding between a balance transfer and a personal loan depends on your needs and what you need the funds for.

In general, if you have a relatively small amount of higher-interest debt, a 0% annual percentage rate (APR) balance transfer can make sense. It results in a lower interest rate and allows you to pay off the debt faster without paying interest. However, you need to be able to pay off the debt before the 0% rate expires.

On the other hand, if you need to borrow a relatively large amount of money, a personal loan might make more sense. A personal loan can potentially allow you to consolidate a larger amount of debt and pay it off over an extended period of time. Additionally, as a new loan, it’s possible to use the funds for other purposes, such as an emergency expense or a large purchase.

A Combination of Both

It’s not necessary to choose one or the other. One option is to use a balance transfer for a portion of your debt while also getting a personal loan to consolidate the rest of the debt. Additionally, you might use a balance transfer to reduce your interest rate on your debt while using a personal loan to handle an emergency expense. Carefully consider your needs to determine what’s likely to make the most sense for your financial circumstances.

Is It Hard to Get Approved for a Balance Transfer Card?

It can be difficult to get approved for a balance transfer card if you have a poor to fair credit score. In many cases, a borrower needs to have good to excellent credit to qualify for a balance transfer offer.

What Credit Score Do You Need for a Personal Loan?

The credit score needed for a personal loan depends on the lender. Every lender has its own criteria. However, it’s often possible to get a personal loan with fair to excellent credit. Some lenders also provide personal loans to those with a poor credit score.

What Is a Good Interest Rate for a Personal Loan?

A good interest rate for a personal loan depends on your situation and needs. If you have a good credit score, you’re more likely to have access to a lower interest rate. It’s possible to get a rate closest to the promotional or market rate with a higher credit score.

Which One Is the Best Option to Pay Off Credit Card Debt?

Whether to use a balance transfer or a personal loan to pay off credit card depends on how much debt you have. For example, if you have a relatively small amount of debt that you can pay off in 12 to 18 months, a balance transfer might work best. On the other hand, with larger amounts of debt, it might make more sense to use a personal loan to consolidate the debt and pay it off over three to five years.

Which Option Has More Impact on Your Credit Score?

Both a balance transfer and a personal loan can have an impact on your credit score.

A balance transfer card can potentially help increase your available credit and provide a lower debt utilization ratio, while also facilitating a positive payment history with more reasonable payments. This can have a big impact on your score.

A personal loan also helps by providing diversity in credit mix and a way for you to build a positive payment history.

The Bottom Line

It’s possible to use both balance transfers and personal loans to pay off debt. However, each has its pros and cons, and it’s possible to use both to reduce how much you pay in debt and reach your financial goals.