Personal Loan vs Credit Card Balance Transfer

Personal loans and credit card balance transfers cater to different types of debt. 

For a wide-variety of debt, you can opt for a personal loan which allows you to borrow money and make fixed monthly repayments.

If you’re looking to consolidate credit card debt specifically, you can consider transferring your current credit card balance to a balance transfer credit card with lower interest rates and interest-free promotional periods, allowing for repayment flexibility within a specific timeframe.

To learn more about personal loans and credit card balance transfers, plus which solution is right for you, keep scrolling.

What is a Personal Loan?

To begin, let’s break down both debt consolidation methods. We’ll start with personal loans.

What are Personal Loans For?

Personal loans can be taken out for a variety of reasons, maybe you need help funding your education, starting a business, or making home improvements. Most of the time, however, personal loans are often used to help consolidate different kinds of debt – even multiple types all at once.

How do Personal Loans Work?

When you’re approved for a personal loan, you receive a lump-sum of money that you pay back to your lender in monthly installments.

Who Provides you with a Personal Loan?

Traditional lenders are typically financial institutions like BMO, Scotiabank, or TD. To apply for a personal loan, you’ll need to provide your lender with things like proof of income, your address, and your banking information.

How Much do Personal Loans Cost?

How much you’ll pay for a personal loan really depends on your financial situation and how much money you’d like to borrow. Their cost is made up of administration fees, interest rates, and of course, the total amount of the loan itself. 

Are There Different Types of Personal Loans?

Generally, there are two types of personal loans:

• Unsecured: a personal loan received based on creditworthiness. This type of loan doesn’t require collateral, making it a high risk investment for the lender. With this in mind, unsecured personal loans usually have higher interest rates.
• Secured: a personal loan that is “secured” by valuable collateral – like your home or your car. If you become unable to repay your loan, your collateral may be seized by your lender, making this type of personal loan riskier for the loan recipient.

Pros of a Personal Loan

To help you decide whether a personal loan is the right way to tackle your debt, we’ve compiled all the benefits that come with this consolidation method:

• All-encompassing capabilities: personal loans can be used for nearly anything you want and need money for. They’re also beneficial for when you have multiple different types of debt you need to cover (rather than something singular like credit card debt).
• Long-term predictability: personal loans have regular payment plans that can take place over a longer period of time. With these plans, you’ll be fully aware of how much you need to repay on a monthly basis, and how long your repayment plan will take.
• Lower interest rates: most of the time, personal loans have lower interest rates compared to other debt consolidation methods.
• Credit optimization: personal loans can also contribute to a healthy payment history since you’ll have a mix of credit types that you’ll be paying off – which may ultimately boost your credit score.

Cons of a Personal Loan

As always, there are bound to be some drawbacks.

Here’s what might make a personal loan complicated:

• Trickier application process: applying for a personal loan can come with a ton of documentation, making the process more complex than other other consolidation methods. If you don’t have a stable income and proof of this income (among other documents) the application process may be tricky.
• High credit for best results: while you can technically get a personal loan with a lower credit score, you’ll receive the lowest interest rates with a higher credit score.
• Fixed term = limited flexibility: when you set up a fixed payment plan, your personal loan repayments must be consistent. This rigid set-up might become difficult if you have an unexpected shift in your financial situation.
• More time = more interest: sure, the ability to pay off your loan over a longer period of time might be what makes a personal loan so appealing in the first place, but the more time you have to pay off a loan, the more interest you’ll collect in the meantime. That’s why picking the shortest plan possible can be so beneficial.

What is a Credit Card Balance Transfer?

On the other hand, you might simply be wondering how to get out of credit card debt.

Well, there are a few ways to conquer this type of debt (all of which are addressed in the linked blog post above).

In this section, we’ll focus on handling your credit card debt with a credit card balance transfer.

Who are Credit Card Balance Transfers For?

Credit card balance transfers are for cardholders who have accumulated credit card debt by carrying a balance.

How do Credit Card Balance Transfers Work?

To limit the amount of interest they’ll receive on this carried balance, cardholders may transfer their credit card balance from their current credit card to a credit card with lower interest rates.

Oftentimes, good balance transfer credit cards (the cards you'll be transferring your outstanding balance(s) to) will have the best balance transfer and interest rates during a promotional period, which can last up to a year. After this promotional period, these rates may rise. That’s why it’s best to apply for a balance transfer credit card with a promotional period that gives you enough time to pay off your debt – so plan accordingly.

How do you Transfer your Credit Card Balance?

To transfer your current credit card balance, you’ll need to apply for a balance transfer credit card that you're eligible for. To check your eligibility and to ensure the card will cater to your needs, make sure you browse top offers with low balance transfer fees, low APRs, low interest promotional periods, and suitable credit limits to support your existing balance.

Our best balance transfer credit cards blog post will help you navigate the best balance transfer credit cards on the Canadian market and connect you to the application process for the card of your choosing.

Once you successfully apply for a balance transfer credit card, you can initiate your balance transfer with your new credit card issuer, this is usually done online or by phone.

Pros of a Credit Card Balance Transfer

Here’s what makes a credit card balance transfer so valuable:

• Nearly hassle-free: when applying for your new balance transfer credit card, you’ll be put through a simpler process that won’t require tons of paperwork. You’ll only need to fill out the questions on the credit card application.
• The promotional period sweet-spot: if you can pay off your transferred credit card balance within your new balance transfer credit card’s promotional period, you’ll be subject to the lowest interest rates and transfer fees.
• Flexible repayments: with a balance transfer credit card, you’re not as locked in to a payment plan, meaning you can pay off your debt any way you’d like as long as you make your minimum payments (ideally within the promotional period). So, if you earn extra money one month, you can contribute more towards your balance, and if you earn less another month, you can contribute what you can.

Cons of a Credit Card Balance Transfer

The same way we provided the benefits of balance transfer credit cards, we’re also going to provide the downfalls of this debt consolidation method. When you opt into a credit card balance transfer, you might run into complications like: 

• Some strict application requirements: while you may not need to supply piles of paperwork, the application process for a balance transfer credit card might still call for good credit scores. This will all depend on the card you’re applying for.
• Low interest is for a limited time only: as mentioned, the best interest rates and transfer fees on a balance transfer credit card are typically provided within the promotional period. These periods don’t usually last any longer than a year or less.
• No same bank balance transfers: this isn’t exactly obvious, so keep in mind that many banks won’t allow you to make a balance transfer to a card from the same financial institution. So, you may need to look outside of your bank for another card to help you save on interest rates.

How do I Know when to Choose a Personal Loan or a Credit Card Balance Transfer?

Now that we’ve looked at each consolidation method separately, let’s combine them for a comprehensive comparison.

To decipher whether you should apply for a personal loan or a balance transfer credit card, follow these steps:

Consider the Type of Debt You’ve Accumulated

If you’ve collected a bunch of different debts outside of credit card debt, a personal loan is better than a balance transfer credit card as it allows you to tackle all of those sources of debt at once. 

As previously stated, balance transfer credit cards are best when it comes to credit card debt specifically, offering you a better card alternative than the one you currently have in terms of interest rates.

Compare Interest Rates and Fees

Both personal loans and balance transfer credit cards come with costs – unfortunately, consolidation is never free.

On top of the loan itself, personal loans are sometimes subject to administration fees, and they’re always subject to interest rates. The administration fee amount will depend on the lender and the loan-type, whereas your interest rates rely on factors like your credit score, your loan term, and your loan amount. The higher your credit score, the shorter your loan term, and the larger your loan, the lower your interest rates are likely to be.

Some balance transfer credit cards have annual fees (usually just under $30), plus balance transfer fees (around 3% of the transfer amount), and while many cards have extremely low or interest-free promotional periods, these periods are pretty short and require you to get your debt together in a limited time frame before interest kicks back in.

Generally, personal loan interest rates tend to be lower than balance transfer credit card interest rates after their promotional periods, however, this may vary by situation.

Keep Your Credit Score in Mind

Applying for a personal loan or a balance transfer credit card can affect your credit score in the beginning. This is because checking-up on your credit health is essential during credit application processes. In these scenarios, lenders and credit card issuers need to implement a hard credit check. Hard credit checks can lower your credit score by a few points. 

Both scenarios can also affect your credit utilization ratio – which is how much available credit you’ve spent compared to how much credit you have and it's a defining feature of your credit score. You want to keep this ratio low – think 30% or lower. These ratios apply to credit cards, so, when you apply for a balance transfer credit card, your available credit expands, making your utilization ratio lower by default. Likewise, if you use a personal loan to cover the outstanding balance on any of your credit cards, your utilization ratio may shrink even more significantly.

On another positive note, personal loans allow you to diversify your credit, which can ultimately improve your credit score.

For both methods, if you make your payments on time and in-full, you can improve your credit health which is directly linked to your credit score.

Go Over Your Repayment Plan and Goals

If you need more time to pay off multiple debts, a personal loan might be the better solution. Credit card balance transfers are typically most ideal for low interest rates in their promotional period, which can be much shorter than an agreed-upon personal loan payment plan.

If you're dealing with credit card debt in particular and you want more repayment flexibility, a credit card balance transfer is superior to a personal loan because there is no fixed monthly payment. You can also repay as much as you want in several different increments, as long as you make your card’s minimum payments. Still, you’ll have a shorter amount of time to avoid higher interest rates and will want to make sure you can pay off your debt within your balance transfer card’s promotional period.

In short, personal loans can give you lower interest for longer, but credit card balance transfers can give you more repayment flexibility.

So, What are the Main Differences Between a Personal Loan and a Credit Card Balance Transfer?

We get it, we unpacked a lot in this blog post.

To help you summarize everything we’ve covered, we created this helpful comparison table that highlights the main differences between a personal loan and a credit card balance transfer:

Who do you Turn to when you Need Help with your Debt?

Let’s say you’re having trouble managing your debt on your own, or you’re still unsure about which debt consolidation method to follow.

In these cases, you should contact Consolidated Credit, a network of credit councellors that will review your debts, budget, and credit to see if you qualify for a debt management program.

Save 30-50% on interest payments

Reduce the high interest on your debt by consolidating it in one place.

Get a personalized debt management plan and a 50% discount on your setup fee.

Consolidate Your Debt

The best part? You can set up a consultation for free! The process is literally as easy as 1-2-3:

Conclusion

The big difference between a personal loan and a credit card balance transfer is that a personal loan can be used to cover multiple different types of debt and credit card balance transfers are best suited to relieving credit card debt alone.

Both debt consolidation methods come with their own costs, whether it be administration fees, annual fees, balance transfer fees, and interest rates.

The interest rates on personal loans are determined by factors like your credit score, the desired loan term, and the loan amount. Most of the time, personal loan interest rates are lower than credit card balance transfer rates after their promotional periods. During their promotional periods, balance transfer credit cards supply some of the best low interest or interest-free rates on credit card debt. So, if you can pay off your credit card debt within your balance transfer credit card's promotional period, a credit card balance transfer is your best bet. But, if you're looking for a long-term loan that surpasses a year and maybe carries more than just credit card debt, a personal loan is best.

These two methods can also impact your credit score with a hard credit check upon application, but if you practice positive spending habits like paying off outstanding credit card balances with a personal loan or making your minimum payments on your balance transfer credit card on time, you can actually boost your credit score. Personal loans can also take this boost a step further since they allow you to diversify your credit with various credit types, making them slightly more optimal for your credit score.