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Personal loan vs balance transfer? There’s been an age-old debate on which method is better. What we do know is that these two give people flexible payment terms to pay off existing loans or debts.
Both methods are unsecured loans which mean that approval is based on your credit scores and not with the collateral you have.
Why Are They Important?
Why do people apply for a loan to pay off an existing loan? It seems confusing, isn’t it?
Well, it’s pretty simple – people make mistakes, and getting a personal loan or a balance transfer card can fix those mistakes by:
1. Consolidating Your Debt
Debt consolidation happens when a borrower applies for a new loan to pay off other liabilities. Here are two hypothetical situations on why people usually consolidate their debts:
- You have five credit cards and all of them have different interest rates. Now, you realized that you can’t afford to pay all of them so you want to put them together under one loan with a lower interest rate.
- You have one huge loan with high-interest rates and you can’t afford to pay it anymore. Now, you want to transfer that loan to a bank or credit card that offers a lower interest rate.
Debt consolidation does not clear debt but it simply transfers your debt to a different lender that offers lower interest rates and longer payment periods.
2. Providing Easy Access To Funds
A personal loan gives you instant access to cash. Once the loan is approved, you can use that money to pay off your existing loans.
But what about balance transfer cards? Well, once you get approved for these credit cards, the issuer will set a credit limit for your account which is typically based on your credit score.
For example, if you have good credit, you might be given an $8,000 credit limit which you can use to pay off loans. You can even transfer cash from your credit card to your personal bank account (but only do this during emergencies).
Personal Loan vs Balance Transfer Cards: What Are The Differences?
As a borrower, you should learn about the differences between the two because there are fees, interest rates, and promotional periods involved. These factors would help you decide on what methods would work best to pay off your loans.
Balance Transfer Cards
The main objective of a balance transfer is to move your high-interest debt from one or more credit cards to a low-interest credit card (a.k.a. balance transfer cards). This allows you to simplify your payments since you’ll only be paying towards one card.
With the low-interest rates, you can also pay off your debts faster since you have extra money to pay towards the principal.
The highlights of a balance transfer card are the 0% intro APR periods which usually lasts between 12-24 months. This means that you won’t have to pay interest in the said period before it goes back to the regular interest rate.
There’s typically a 3% or 5% fee per transfer, however, there are some credit cards that don’t have balance transfer fees.
Why A Balance Transfer Card May Not Be For You
- The transferable amount is limited to your card’s credit limit. You need to have good credit to transfer bigger amounts of debt.
- The 0% intro APR period for a balance transfer credit card usually lasts between 12-24 months. It’s shorter compared to a personal loan that can last to 72 months or more.
Back in the day, it was difficult to have a personal loan approved since they mostly require collateral. However, getting approved isn’t that hard these days since banks and other types of lending institutions are offering unsecured personal loans to people.
You don’t have to worry about your credit scores too since pre-approval for a personal loan doesn’t automatically result to a hard credit pull.
A personal loan is perfect for people who have a really huge amount of debt since the loanable amount can reach up to $100,000 or more. The payment periods are also longer which can reach up to six years or even more.
You typically won’t get this kind of credit limit and payment term from balance transfer cards.
What’s great about a personal loan is that it’s not limited to consolidating or transferring debt. You can also use them for expensive purchases like home renovation or buying a car.
A personal loan may or may not have origination fees. These are processing fees charged on top of the loan amount, and they typically range between 1% – 8%.
Why A Personal Loan May Not Be For You
- A personal loan doesn’t have a 0% intro APR so you always pay interest on a monthly basis.
- You need to pay the exact amount every month based on the term given to you. It’s less flexible because compared to balance transfer cards where you have to option to pay the minimum monthly payment.
Personal Loan vs Balance Transfer: Which Should You Choose?
Both methods have pros and cons so it’s quite confusing to choose one that works best for you. You might end up making matters worse if you pick the wrong method.
To make things easier, these are four factors you should consider before you make a decision.
What Kind Of Debt Do You Have?
A personal loan has lesser restrictions on debt consolidation and its a better option if you have different types of debt. Once your loan is approved, you’ll get a lump sum amount which you can use to pay all of your debt from various lenders.
Meanwhile, a balance transfer will only allow certain types of debt that you can move to your new credit card. The transfers are typically between credit cards only. There’s only a handful of balance transfer cards that will let you transfer student loans, car loans, or mortgage.
In addition, some issuers won’t even allow a balance transfer unless it’s from a different credit card company.
How Big Is Your Debt?
A balance transfer card or a personal loan may or may not pay off all of your existing debt. However, a personal loan typically offers higher credit limits compared to balance transfer cards.
If a balance transfer card can pay off your current debt, always go for a balance transfer. They come with rewards and 0% intro APR periods so you’ll get more benefits than just being able to consolidate your debt.
Are There Transaction Fees?
It’s uncommon for a personal loan to have transactions fees, but if there are, it’s either paid upfront or added to your monthly payments.
Meanwhile, balance transfer cards usually have transfer fees per transaction which range between 3% – 5% or a minimum fee of $3 – $10. They have annual fees too, especially if it comes with lots of rewards.
However, there are also cards that don’t charge balance transfer fees, annual fees, and even foreign transaction fees.
What Are The Interest Rates?
When you choose between a personal loan vs balance transfer, the latter is obviously the cheaper option. You’ll get a 0% intro APR period where you can pay your debt without accruing any interest. After the intro period ends, the ongoing APR would apply which is usually 12%- 23% depending on how good your credit score is.
Meanwhile, even though a personal loan doesn’t have 0% intro APR periods, the interest rates are lower compared to a balance transfer card’s ongoing rate.
Thoughts From Points Panda
A personal loan isn’t entirely better than a balance transfer and vice versa. Both methods are great when it comes to debt consolidation and it really depends on what your needs are.
Since a personal loan offers longer payment terms at lower fixed rates, it’s perfect for huge debt coming from multiple lenders.
Meanwhile, balance transfer cards are perfect for smaller amounts that you can pay within 12-24 months. Just remember to pay as much as you can during the 0% intro period to make a big dent on your existing debt.
Can You Use Both Methods?
Yes, you definitely can. It’s not really necessary to consolidate all your debt by using one method.
For example, you have $10,000 worth of credit card debt and you want to move it to a low-interest balance transfer card. However, you know that it’s impossible for you to pay everything off during the 0% intro APR period, and you realize that you’ll incur a higher interest rate after the period is over.
So what do you do? Well, you can transfer half of your debt to the credit card so you won’t have to pay any interest during the intro period. Meanwhile, you can apply for a personal loan at a lower interest rate to pay off the rest of your debt.
If you use both methods, you can save lots of money on interest rates. There’s also a lesser risk of incurring a high-interest rate if you’re not able to pay before the intro period ends.