Balance Transfer Credit Card vs Personal Loan: Which One Works Best For Debt Consolidation?

Jan 22, 2021
credit cards
By Staff writer

Both balance transfer credit cards and personal loans are a great way to pay off your debt. You can easily consolidate and pay for what you owe, and pay it off with (ideally) a lower interest rate moving forward. Finding the best balance transfer or personal loan term can simplify your finances and get you out of debt faster.

While both of these are great financial opportunities, there are pros and cons to both options. Take a look at these side by side comparisons.

What is a balance transfer credit card?

A balance transfer credit card gives you an annual purchase rate (APR) of 0% on balance transfer you made during a certain period — usually within 12 to 20 months. Transferring your balance means you have the chance to pay for the debt without incurring interest.

Balance transfer credit cards must be used strategically as they often have higher interest rates when the introductory period ends. If you can’t pay for your credit card debt on time, you can end up with a higher-interest debt later on.

Pros of balance transfer credit cards

  • Pay for your debt without interest fees for a limited time
  • Every repayment goes directly to your principal amount
  • Balance transfer cards come with great perks and rewards
  • 0% APR balance transfer means no annual charges

Cons of balance transfer credit cards

  • 0% balance transfer is available for a limited time only
  • The amount you can borrow is way lower than personal loans
  • You may have to pay for transfer fees depending on the amount you move
  • You may incur charges if you don’t meet the terms of the lender
  • Credits made after the introductory period has a higher interest rate
  • Applying for one may hurt your credit score
  • It’s not ideal to use it for your daily expenses

What is a personal loan?

A personal loan is a great way to consolidate your debts. It lets you borrow a larger amount with longer repayment periods compared to balance transfer credit cards. They offer fixed interest rates with fixed monthly payments, and on a fixed timeline! As long as you’re a responsible payer, you won’t have surprises or surges in your finances.

This is a great choice if you’re trying to save money and pay off your debt at the same time, because the interest rate tends to be lower. Usually, it's hard to get approved for a personal loan. However, most banks have made their process easier and more accessible to Kiwis.

Pros of personal loans

  • Fixed monthly payments on a fixed timeline helps you come up with a payoff plan
  • Get competitive interest rates for the lifetime of the loan
  • You can split the repayment terms for a long time
  • It covers a wide range of debt, not only including credit card debt
  • You can borrow a large amount of money

Cons of personal loans

  • Some personal loans require you to pay origination fees
  • 0% APR isn’t available with personal loans unlike balance transfers
  • You can pay extra charges if you plan to pay your loan early
  • The total amount may come higher if your repayment period is longer
  • It may mean having assets possessed by the lender if you have a low credit score

Compare balance transfer credit card and personal loan side by side

Still confused as to how they exactly differ from each other? From interest rates to repayment conditions, here’s a side by side comparison.

Balance Transfer Credit Card Personal Loans (For Debt Consolidation)
Works best for Smaller debts to be paid in a short amount of time Larger debts that you may not be able to pay in a short period
Amount you can borrow $300 to $15,000+ depending on the bank $1,000 to $100,000+ depending on the bank
Repayment conditions Pay the full amount during the introductory period Monthly repayments for the lifetime of the loan
Requirements for approval Good credit score is required Good credit score is preferred, but a bad credit score is fine too
Interest rates 0% APR during the introductory period 5.99% to 35% APR depending on the lender
Fees Balance transfer fee of anywhere between 0-5% of the amount transferred Origination fee between 0-8% of the amount borrowed

How should I know which one works best for me?

While their purpose is the same, they work differently in consolidating your debts. To know which one works best for your financial situation, answer the following questions.

What type of debt do you have?

Depending on the debt you have, your debt consolidation may vary. 

Since a personal loan lets you borrow a bigger amount, it's good for large debts such as mortgages, overdue lease payments, short term loans, as well as accumulated credit card debt. The lender can credit the money into your account directly. Or, you can let the lender pay the debt themselves, and simply pay them later on.

For credit card debt, a balance transfer credit card is a better option. However, if you already know that it's hard for you to commit to paying for another credit card, then it's best to stay away from plastic for now. Otherwise, you’ll have to pay with higher APR after the introductory period expires.

How will they affect my credit score?

Whether applying for a new credit card or personal loan, it can affect your credit score negatively. Either way, you may also need at least an acceptable credit score to apply for one.

Applying for a balance transfer can lower your credit score at first, but it can easily bounce back as long you complete the repayments for your debt. Your credit utilisation rate can also increase once you finish paying off your debts. This makes it more ideal to increase your credit score.

Similarly, applying for a personal loan can also lower your credit score for a time. As you repay your loan, you can increase your credit score too. Unlike balance transfer credit cards, it may not increase your credit utilisation rate as this only applies to credit cards.

What are other options to consolidate my debt?

If you don’t find these two options fitting to your financial situation, check out this list.

  • Nonprofit credit counselling organisations - Aside from helping you lower your interest rate and payment amounts, they may offer debt management plans.
  • Refinancing your debt - For example, you have an existing car loan, get another car loan to pay for your old one, then pay for the new one moving forward.
  • Negotiating with your lenders - Sometimes, all it takes is a simple conversation with your creditors to lower the rate for you.

Where can I find the best rates for balance transfer credit cards and personal loans?

On the other hand, if you find a balance transfer credit card or personal loan that fits your financial situation, make sure you have the best rates! Instead of helping you go debt-free, a bad deal may put you into more financial troubles.

Get the best rates among the top providers in New Zealand! Simply visit glimp and compare your best options today!

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