Personal loans vs. balance transfers: What’s right for you?
Brooke Thio, Content Specialist
Personal loans and balance transfers are both useful options for managing your debt at lower interest charges. If you’re wondering which is the better choice for you, this guide will show you the key features, benefits, and downsides to consider.
Key takeaways
- Uses: Personal loans can be used for anything you want, but they’re commonly used for consolidating different types of debt. Balance transfers are often used to consolidate credit card debt.
- Repayment terms: A personal loan lets you make fixed monthly repayments over a period of time, while a balance transfer lets you pay off your balance as quickly as you want.
- Chances of approval: It’s easier to get approved for a personal loan if you have a lower credit score — but you’ll be offered less favourable interest rates and terms.
Personal loans vs. balance transfers: What’s the difference?
A personal loan is typically a lump-sum loan that you pay off in monthly instalments. While the money can be used for any purpose, personal loans are useful for debt consolidation, where you use the funds to pay off existing debts. You’ll then repay the loan over a set period of time, which can be as long as seven years.
A balance transfer involves transferring the balance on one or more credit cards to a new credit card with a 0% promotional interest rate (often around 12 months). If you pay off your balance before this promotional period ends, you won’t owe any interest. However, if you carry a balance after the promotional period, you'll encounter high interest charges again.
Key differences between a personal loan and a balance transfer
|
Personal loan |
Balance transfer |
|
| Interest rates | Lower than a credit card | Introductory 0% interest period, followed by typical credit card interest rates |
|---|---|---|
| Fees | Some charge an origination/administration fee of 0.5%–5% | One-time transfer fee of 1%–3% |
| Amount and type of debt | Larger amounts, varying types of debt | Smaller amounts, mainly credit card debt |
| Repayment schedule | Fixed repayment schedule and amount | Flexible, as long as minimum payment is made |
| Credit requirements | Good credit preferred; better credit = better rates and terms | Good to excellent; options available for fair credit |
| Impact on credit score | Enhances credit mix and shows on-time payments | Reduces credit utilization over time |
What to consider when choosing a personal loan or balance transfer
1. Interest rates and fees
Balance transfers often offer an introductory 0% interest period, but rates after the introductory period are generally higher than personal loan interest rates. If you have a plan in place to pay off your debt before the promotional period ends, this can save you money.
Personal loans, on the other hand, typically offer much lower interest rates than the non-promotional interest rates on balance transfer credit cards. For example, a Scotiabank personal loan APR might be 6%–10% while the best balance transfer cards have a non-promotional interest rate of 12.99%–23.99%.
Most balance transfer offers charge a one-time fee, typically around 3% of the amount you’re transferring. Some personal loans also charge a origination/administration fee, which may be 0.5% to 5% and deducted from the loan amount. Banks and credit unions usually do not charge this fee.
2. Amount and type of debt
If you have a small amount of debt, or if you have mainly credit card debt, balance transfers may be a better option since most balance transfer credit cards only allow you to consolidate other credit card balances.
If you have a larger debt or different types of debt, a personal loan is a better choice for debt consolidation as balance transfers are subject to your credit limit, whereas personal loans may allow you to borrow up to $200,000.
3. Repayment schedule
A personal loan is usually repaid with fixed monthly payments over an agreed period of time. This can be helpful for budgeting and keep you on track to clear your debts.
With a balance transfer, however, you can choose how much to pay off your balance as long as you make the minimum payment. This gives you more flexibility, but you need to be disciplined and pay off your balance by the end of the promotional 0% interest period — otherwise, you may end up accumulating more credit card debt as higher interest rates kick in.
4. Credit requirements
Credit requirements for a personal loan vary by lender, but you can get a personal loan even with a fair credit score (660-724). The higher your credit score, the better the interest rates and terms. If you have a low credit score, consider a debt consolidation loan for bad credit.
Balance transfers usually require good to excellent credit, but our top-rated balance transfer credit cards include some that are available to those with a 660+ credit score.
5. Credit score impact
Finally, personal loans and balance transfers will impact your credit score in different ways. With a personal loan, you’re diversifying your credit mix and building a positive payment history. These can help improve your credit score.
Balance transfers, on the other hand, might negatively impact your credit score at first if you transfer all your debt over and max out the credit utilization on your card. As you pay down your balance, you’ll see your score bounce back.
Alternatives to personal loans or balance transfers
If you’re looking to consolidate your debt, another option to consider is a line of credit, which generally offers lower interest rates than a personal loan.
Whichever option you choose, make sure to have a solid debt repayment plan and adopt healthy habits like budgeting to stay debt-free and achieve financial security.