Last updated on March 7th, 2023
Large debts can get someone to research balance transfers and personal loans. Both share the potential to help individuals pay down existing debt. Personal loans and balance transfers also have individual features that may or may not appeal to the potential borrower in search of some financial relief. Read on to learn more about balance transfers and personal loans and discover which is right for you.
What Is A Balance Transfer?
A balance transfer is when you transfer an existing credit card debt to another credit card account. Typically, a balance transfer happens in the pursuit of a lower interest rate. With a lower interest rate on an existing credit card debt, the debtholder has a better chance of chipping away faster at the balance and paying less interest, in the long run, potentially saving hundreds of dollars.
How To Calculate Your Monthly APR
To calculate the monthly interest charge on an existing credit card debt, divide the APR by 12 (months), then multiply the answer by the total debt balance. Here’s an example. Consider a credit card debt of $5,000 with a 27.24% APR, divide the APR by 12 (months), then multiply the answer by the current balance ($5,000).
27.24% = 0.2724
0.2724 ÷ 12 = 0.0227
0.0227 x $5,000 = $113.5
In this hypothetical scenario, if the cardholder carried the $5,000 balance over month-to-month and made a $200 minimum payment, the total interest paid on $5,000 over one year could be as high as $1,110.95 with a remaining statement balance of $3,932.39
| JAN | FEB | MAR | APR | MAY | JUN | JUL | AUG | SEPT | OCT | NOV | DEC | |
| Principal Balance | $5,000 | $4,913.15 | $4,824.69 | $4,734.21 | $4,641.68 | $4,547.05 | $4,450.27 | $4,351.29 | $4,250.06 | $4,146.54 | $4,040.67 | $3,932.39 |
| Interest Charge | $113.50 | $109.52 | $107.47 | $105.37 | $103.22 | $101.02 | $98.77 | $96.48 | $94.13 | $91.72 | $89.26 | $86.75 |
Balance Transfer Credit Cards
In the previous example, it’s easy to see how a balance transfer could benefit a cardholder with a bit of existing credit card debt, especially with a good strategy. Transferring the existing debt to a balance transfer credit card with a 0% intro APR is an excellent start. Consider how long the introductory offer runs and pay attention to what the APR rate is once the introductory offer ends. Keep in Mind there may also be balance transfer fees.
Consider credit cards like the Citi® Diamond Preferred® Card or the Citi Simplicity® Card for a balance transfer. Both cards offer a 0% Intro APR for 21 months on balance transfers from the date of first transfer and 0% Intro APR for 12 months on purchases from the date of account opening. The 21-month introductory offer is a lengthy one (almost two years) and buys more time for the cardholder to tackle the transferred debt.
If you want to learn more about balance transfers, click here.
What Is A Personal Loan?
A personal loan (a.k.a unsecured loan) is money borrowed from a financial institution like a bank, a credit union, or a lender. Personal loans are lines of credit that typically have a fixed interest rate and are paid for in installments over a period, either short-term or long-term. Approval for a personal loan usually depends on the applicant’s credit score and debt-to-income (DTI) ratio.
The Uses of a Personal Loan
A personal loan can help finance many borrowers’ needs, including debt consolidation. Moreover, a personal loan can be used to finance things like home improvement projects, major purchases, and even to cover expenses like a medical bills or a pricey car repair service.
A Comparison
In terms of similarity to a balance transfer, debt consolidation through a personal loan has similar qualities. Both may have competitive interest rates and can be used to pay off an existing debt sooner. However, as mentioned previously, a personal loan is paid in installments at a fixed rate and a fixed-term loan. As a result, the borrower gets a fixed monthly payment, so there are no surprises and no heavy calculating when the time comes to make a payment.
The difference between balance transfers or personal loans when managing existing debt is that balance transfer credit cards often have a 0% introductory APR offer, and personal loans do not. With a personal loan, the borrower agrees to pay the calculated interest even if they pay off the debt early. Whereas with a balance transfer credit card, assuming it has a 0% intro APR, the cardholder can take advantage of a no-interest period and the flexibility of no fixed monthly payments.
| Pros | Cons | ||
| Balance Transfer | Personal Loan | Balance Transfer | Personal Loan |
| 0% Intro APR Offers | Fixed Rates/Lower Rates | Balance Transfer Fees | Personal Loan Fees |
| Flexible Payments | Installment Payments | Approval Based on Credit Score | Approval Based on credit score & DTI |
| Could potentially bump up your credit score or help show a positive credit history | Late or missed payments can affect your credit negatively | ||
| Competitive Interest Rates | Can only use for existing credit card debt | May require collateral if going for a secured personal loan | |
Which Is Right For You?
If you’ve made it this far into this balance transfer and personal loan comparison, you may be asking yourself, which is right for you? It depends on your finances and your comfort level for managing money. If a fixed monthly payment really simplifies a debt or at the very lease makes it less daunting, then a personal loan could be the right move for you. If tackling an existing credit card debt with the option of a 0% intro APR, then a balance transfer credit card may be the way to go. Keep in mind, that both will make an impact on your credit score and should be used responsibly.
Related Article: The Best Balance Transfer Credit Cards of 2022
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