Balance Transfer or Personal Loan: Which Works Best for You?

Stuck choosing between paying your bills or paying off debt? It's a tough spot to be in, but you’re not alone. Sometimes, a little extra help can make all the difference. A balance transfer or a personal loan are two ways to simplify your finances by turning multiple bills into one monthly payment. These options might lighten the load and give you some breathing room while you get on the path to paying down debt. Let’s look at the differences between a balance transfer and a personal loan to help you make the best decision for your situation.

How does a balance transfer work?

A balance transfer is typically done with a credit card, ideally one with an introductory or promotional offer for 0% or low APR. These cards often require good to excellent credit in order to qualify.1

Here's how it works: if the offer is available, you'll move or pay off your existing higher interest credit card debt to a credit card with a different issuing bank. It’s important to note that some issuers charge a 3% to 5% balance-transfer fee that is added to the transfer amount you request. This means that you may reduce your credit limit more than you anticipated once this fee is added to your transferred balance.^1,2

Although this fee could add to your debt at first it may still be worth the cost if you’re able to pay it all off before the offer period ends.¹ The introduction or promotional offer will last anywhere between 12 to 21 months. After it ends, a much higher interest rate will typically apply to the remaining balance.² You can save on interest charges if you repay your debt during the offer period.³

And, although you can typically make new purchases on your balance transfer card, those purchases are usually subject to a higher rate than the balance transfer rate. Always check the details of your credit card agreement to avoid paying more in interest.

How does a personal loan work?

A personal loan allows you to borrow a lump sum of money upfront from a bank, credit union or lender, money that you can then use to pay off your debts, cover emergency expenses, fund home improvements or car repairs. Depending on the lender, personal loans may be a better choice than a balance transfer if you have less-than-stellar credit. OneMain takes into consideration a variety of factors, in addition to your credit score, to help you find a loan that fits your budget. Once you take out a personal loan, you get the confidence of predictable fixed monthly payments and repaying what you borrowed plus interest over a set period of time. As long as you make on-time payments, you’ll know exactly when your loan will be paid off.

If you are approved for a loan with a lower interest rate than the rates on your current debts, you could save money on interest. You also get the simplicity of a single payment versus many, which reduces the stress from juggling dates and deadlines. Many lenders decide your personal loan interest rate by looking at several factors like your creditworthiness, debt-to-income ratio (DTI), employment history and loan type.⁴ It depends on the lender, but most personal loans include an origination fee, which is a one-time fee for processing an application and setting up the loan. For OneMain this fee could either be a flat amount, ranging from $25 to $500, or a percentage of the loan amount, ranging from 1% to 10%. (Percentage-based fees are subject to certain state limits.) Keep in mind that an origination fee may reduce the amount of money that you receive or that is available to pay off existing debts.

Factors to consider when deciding between a balance transfer or personal loan

Whether you’d be better off with a balance transfer card or personal loan depends on a few factors, including:

The types of debt you need to repay

Balance transfer cards are typically used to pay off higher-interest credit card balances. On the other hand, personal loans are often used to consolidate various types of debt including credit card debt, other personal loans, medical bills and more.

How much you need to borrow

The amount of debt you want to transfer or consolidate will determine the size of the line of credit or personal loan. You’ll need to request a balance transfer or apply for if you want a personal loan. The credit limit you'll be assigned for a credit card varies depending on the issuer and is typically based on your creditworthiness. The credit limit may or may not cover the entire balance you need to transfer, so it’s important to check to see if there's a balance transfer limit.⁵ Many credit card issuers will allow you to transfer your entire balance while others may cap your debt transfer amount at around 75% of the card’s overall credit limit. Some issuers put limits on the amount that can be transferred within a certain timespan.⁶

You can apply for a personal loan that matches the amount of debt you have, which could be a good option when you need to consolidate higher interest. With a OneMain personal loan, there are two types of loans included a secured loan or unsecured loan. With a OneMain personal loan, you could borrow between $1,500 to $20,000, depending on what you’re approved for.⁷

Your credit history

You might have trouble qualifying for a new credit card if you have less-than-perfect credit, especially if you owe a significant amount of debt.1 In this case, you may have a better chance of getting approved for a personal loan. Lenders like OneMain look beyond credit scores, focusing on your entire financial picture, including your ability to repay the loan, to find the right loan for you.

You may also qualify for a secured personal loan. A secured loan requires that you provide collateral, like a vehicle. An unsecured loan doesn't require any collateral from you. Keep in mind that there are eligibility requirements such as the condition and age of your motor vehicle and proof of insurance. Also, if you default on a secured loan, the lender has the right to take the collateral.

Your repayment plan

Many balance transfer cards offer an introductory or promotional APR, where they charge you little or no interest for a limited time. Since balance transfer credit cards only offer promotional APRs for a short time, often several months to a year, you should consider whether you can repay your debt before the promo period ends. When a promotional APR ends, it defaults to a higher variable rate, so you'll pay more APR on any remaining balance.

If you won't be able to repay your debt before the promotional APR expires, a personal loan with a longer term and fixed payment amount may make more sense for your situation.

Take some time to review your budget to figure out how much you can afford to pay and when you’d expect to fully pay off your debt in both scenarios to help you make your decision.

Should you take out a balance transfer card or a personal loan?

Both balance transfer cards and personal loans offers can be good choices if you need to consolidate debt and simplify your finances. Debt consolidation is especially important if you need to improve your credit or reduce the amount of debt you have in order to purchase a home or upgrade your family car in the future. However, the best choice depends on the factors we mentioned above and your personal preferences and circumstances.

A credit card with a balance transfer offer could be a good fit if you feel confident that you’ll be able to pay off your balance when the offer period ends. If you owe a large amount of debt, need more time to pay it off, and your credit score needs a bit of improvement, a personal loan may better suit your needs. If you're ready to move forward with a personal loan to pay off your debt, you can check for prequalified offers from OneMain, and it won’t affect your credit score.

Sources

1 https://www.bankrate.com/credit-cards/balance-transfer/how-to-do-balance-transfer-with-bad-credit/
2,3 https://www.bankrate.com/credit-cards/zero-interest/zero-percent-intro-apr-guide/#balance-transfer
4 https://www.investopedia.com/terms/p/personal-interest.asp
5,6 https://www.bankrate.com/credit-cards/balance-transfer/what-is-the-limit-for-balance-transfer-cards/#transfer