It’s that time again, where I compare balance transfers to other financial instruments to see which is best in particular situations.
Today’s matchup: “balance transfer vs. personal loan.”
In short, a balance transfer allows you to shift high-APR debt from one credit card to another (what is a balance transfer?).
Sometimes, you’re also able to deposit cash into your bank with the use of a balance transfer check.
If this is the case, you can pay down pretty much anything else as well, be it an auto loan or some other outstanding loan you’ve got.
Either way, balance transfers typically offer some kind of promotional APR for a fixed period of time.
For example, it’s common to see 0% APR for 12 months on balance transfers.
This means you pay zero interest for the first year – after that, the balance transfer APR shifts to the standard purchase APR, which will likely be in the high teens to low 20% range.
A personal loan, on the other hand, provides you with a lump sum of money that can be deposited into your checking/savings account.
That money can then be used to pay off high-APR debt of any kind, such as credit card debt, an auto loan, a cash advance, etc.
Typically, the interest rate is fixed and the loan has a certain duration, such as five years.
For example, you may qualify for a $10,000 personal loan at an interest rate of 13% APR, with a term of five years.
You’d pay roughly $3,700 over that time to borrow the money, which obviously beats a 20%+ interest rate you may have on other credit card debt.
But is it the best move?
Perhaps you could balance transfer $10,000 worth of high-APR debt to a credit card offering 0% APR for 24 months.
And then make sizable monthly payments until it’s paid off in full by month 24. In this case, you’d only pay the balance transfer fee, which if the standard 3%, would be $300.
That sure beats paying $3,700 in interest, right?
Well, it’s not quite that simple. With the balance transfer, you’d be paying roughly double each month to pay down the balance to zero before the rate resets higher.
Additionally, you may not be able to qualify for a $10,000 balance transfer, so there’s a chance you wouldn’t be able to convert all the debt to a 0% balance transfer credit card.
Pros of Balance Transfers
– 0% APR
– Less interest paid
– Lower monthly payment
Cons of Balance Transfers
– Less time to pay of the balance
– Variable rates once promotional period ends
– Good credit score needed
– Balance transfer fees
Pros of Personal Loans
– Fixed interest rate
– Larger loan amounts possible
– More time to pay off the balance
– Options for those with poor credit
Cons of Personal Loans
– Higher APR
– More interest paid
– Down payment may be required
– Possible prepayment penalty
So there it is…for me, the balance transfer is always going to be the better choice, assuming it’s an option.
But it requires a good credit score, and may be limited as far as what debt can be paid off. You also run the risk of getting hit with a variable rate if you don’t pay it off during the promotional period.
However, the savings associated with a balance transfer can be monumental if you’re responsible and dedicated to tackling your debt.
Also see: Balance transfer vs. cash advance.