Personal Loan vs. Balance Transfer: Which Is Right For You?

Personal loans and balance transfers are two popular ways to consolidate debt and get a lower interest rate. But which one is right for you?

What is a personal loan?

Personal loans are a different type of loan that you can use to consolidate debt or pay for other expenses. Personal loans typically have lower interest rates than credit cards, and you can borrow more money with a personal loan. Personal loans are typically unsecured, meaning that you don't need to put up any collateral to qualify. Check out NerdWallet’s Personal Loans Tool to compare your options.

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What is a balance transfer?

Balance transfers allow you to move debt from one credit card to another, typically with a lower interest rate. This can be a great way to save money on interest, especially if you can qualify for a 0% APR balance transfer offer (this means paying no interest for an initial promotional period!). However, balance transfers often have fees, and the promotional interest rate only lasts for a limited time. Read more about NerdWallet’s top picks for September 2023 here.

So, which one is right for you?

If you have a small amount of debt and can pay it off quickly, a balance transfer may be a good option. But if you have a large amount of debt or need a longer repayment period, a personal loan may be a better choice.

It’s also important to:

  • Consider the amount of debt you have and how long it will take you to pay it off.
  • Compare the interest rates, fees, and repayment terms of different loans and balance transfers.
  • Make sure you have good credit to qualify for a personal loan or balance transfer with a low interest rate.
  • Consider your financial goals and how a balance transfer or personal loan can help you reach them.

Let’s Talk Pros & Cons:

Personal Loan Pros:

  • Lower interest rates: Personal loans typically have lower interest rates than credit cards, especially if you have good credit.
  • Longer repayment terms: Personal loans also typically have longer repayment terms than credit cards, which can make it easier to manage your monthly payments.
  • Can improve your credit score: When you take out a personal loan and make on-time payments, it shows lenders that you're a responsible borrower. This can lead to a higher credit score and lower interest rates on future loans.

Personal Loan Cons:

  • No 0% introductory APR: Personal loans do not offer a 0% introductory APR period.
  • May require a credit check: Most lenders will require a credit check when you apply for a personal loan.
  • May have prepayment penalties: Some personal loans have prepayment penalties, which means you may have to pay a fee if you pay off the loan early.

Balance Transfer Pros:

  • 0% introductory APR: Balance transfer credit cards typically offer a 0% introductory APR period, which can range from 12 to 21 months. This means you won't pay any interest on your transferred balance during the introductory period.
  • Potential to save money on interest: If you can pay off your transferred balance during the introductory period, you could save a significant amount of money on interest.

Balance Transfer Cons:

  • Balance transfer fees: Most balance transfer credit cards charge a fee, typically 3% to 5% of the amount transferred.
  • High interest rates after the introductory period: After the introductory period ends, the interest rate on your transferred balance will typically rise to the card's regular APR, which can be quite high.
  • New credit account opening could hurt your credit score: Opening a new credit account can temporarily lower your credit score.

But…there are other ways to consolidate debt!

If you don't qualify for a personal loan or balance transfer, you may be able to consolidate your debt with a home equity loan or line of credit. You may also be able to work with your creditors to negotiate lower interest rates or monthly payments.

Debbie also works with credit unions to refinance high- interest debt at lower rates, reducing your debt burden.

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Debbie’s Rate Crusher marketplace works like this:

  • It allows you to pay off and replace your existing high interest debt (think 15%+ personal loans and 20%+ APR credit cards), with a lower interest rate loan (9-15%).
  • You can design your ideal loan offer, between the APR, monthly payment, and total debt you’d like to pay off
  • Debbie matches you with credit unions in your area who will likely get you an offer
  • Once you accept, Debbie offers rewards bonuses for paying the loan down on time

Read more about Rate Crusher and how to qualify.

Note: Replacing your high interest debt with lower interest debt, can save you thousands in interest, but that is not the end of your debt payoff journey. You also have to make sure not to rack up your credit cards again - that’s why Debbie’s money psych course is designed to help you reduce spending and use credit responsibly.

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!

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Debbie is an app that uses behavioral psychology and prizes to help you pay off debt for good. The app rewards you for paying off debt with lower interest rates on your current credit, as well as cash. Start our free money psychology course today to get qualified. Start Now →

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