Balance transfer vs. personal loan: What's the difference?

Balance transfer cards and personal loans are two popular methods for consolidating debt. Both allow you to transfer debt from other places into a single monthly payment while potentially saving on interest, but there are key differences in how they work.

Let’s take an in-depth look at both options so you can decide which might be right for you.

What is a balance transfer card?

A balance transfer card allows you to move an outstanding balance from one credit card to another. You can transfer multiple balances as long as you don’t exceed your balance transfer limit.

Balance transfer credit cards sometimes offer a low introductory APR on balance transfers for a set period. This can give you time to repay your debt while avoiding higher interest charges on balance transfers.  After the offer period ends, you’ll start being charged interest on whatever balance is left based on the APR for balance transfers that applies to the card.

Balance transfer card pros and cons

Balance transfer cards come with pros and cons. Understanding these can help you make an informed decision based on your financial situation.

Pros of balance transfer cards

• Save on interest: Balance transfer cards may offer a low introductory APR. You can avoid higher interest charges if you pay off your balance during this offer period.
• A single monthly payment: Instead of managing multiple credit card balances, you may be able to consolidate all your debt onto one card (provided you don’t exceed the limit). This can simplify your finances and make it easier to keep track of payments.
• Flexible repayment: As long as you make the minimum payments each month, you’ll avoid higher interest charges on balance transfers during the intro period. This can give you flexibility to pay more some months and less during others during the intro period.

Cons of balance transfer cards

• Balance transfer fees: Most balance transfers aren't free. For each balance transfer, card issuers may charge either a flat fee or a percentage of the balance (usually whichever is higher). 
• Creditworthiness requirements: Credit cards with low introductory APR offers typically require good to excellent credit scores. If you have a lot of revolving debt, you may also have a high credit utilization ratio. High utilization can lower your credit score, and you may have a harder time getting approved.
• Promotional APRs are temporary: The low introductory APR on balance transfers expires after a set period. Any unpaid balance will incur interest charges at the end of the offer period based on the APR for balance transfers that applies to the card.

When does a balance transfer card make sense?

 Here are a few times when a balance transfer makes the most sense:

• You can repay the balance within the promotional period: Repaying your balance within the promotional period can mean big savings on interest. If you’re confident you can repay the balance before the intro APR period ends, a balance transfer card could be the right move.
• You know you’ll save money: What if you anticipate paying off most but not all of your balance before the promotional APR ends? If you look at the numbers and find out that, between interest on the remaining balance after the promotional APR ends and fees, you’ll still save money, a balance transfer card can make sense.

What is a personal loan for debt consolidation?

A personal loan is usually an unsecured installment loan with a fixed interest rate. Your creditworthiness, income and other factors determine your borrowing limit and interest rate.

You can use a personal loan for almost anything, including debt consolidation. You can use funds to repay outstanding credit card balances and loans, rolling multiple monthly payments into one. Some lenders can place restrictions on using the personal loan proceeds on certain expenses such as post-secondary education expenses or for business purposes.

Some lenders offer debt consolidation loans. These are still personal loans. Sometimes, rather than depositing funds into your account, the lender will pay your creditors directly. Some lenders can place restrictions on using the personal loan proceeds to pay off outstanding credit card balances with the same lender that issues the personal loan.

Personal loan pros and cons

Like balance transfer cards, personal loans for debt consolidation come with their own pros and cons. Understanding these can help you decide whether a personal loan is the right option for you.

Pros of personal loans

• One monthly payment: Consolidating debt with a personal loan can mean rolling multiple debts into one fixed monthly installment, simplifying your finances and making it easier to track payments.
• You may be able to save on interest: Depending on the loan term and interest rate you qualify for, you may save money on interest and even pay your debt off sooner. However, depending on the loan term it is possible you will end up paying more in interest over the life of the loan even if your monthly payment is lower.
• Fixed interest and monthly payments: Your interest rate remains fixed for the life of the loan. And, because personal loans come with a set term, you’ll know exactly what your monthly payment will be. As long as you make your payments consistently and on time, your monthly payment will not change, making personal loans easier to plan and budget around.
• Flexible loan terms: Many lenders allow you to choose a loan term. Longer terms can allow for a lower monthly payment, while a shorter term may mean a higher monthly payment. The loan term impacts how much you pay in interest over time, so be sure to carefully evaluate if the payment terms and interest is the right decision for you.

Cons of personal loans

• Credit score requirements: Personal loans can save you the most money if you qualify for a lower interest rate. As with other loans and credit cards, you have the best chance of securing a low interest rate when you already have a good or excellent credit score, but lenders can consider other factors including your debt-to-income ratio, income, and other outstanding debts.
• Additional fees: Lenders may charge additional fees, like origination fees for processing your application and disbursing the funds, and prepayment fees for paying off the loan early.
• You could pay more over time: If you opt for a longer loan term, you may end up paying more even if the interest rate is lower than what you’re currently paying.

When does a personal loan make sense?

Here are some situations when a personal loan can make the most sense:

• You’ll save money: If you qualify for an interest rate that’s lower than what you’re paying on your current debts, consolidating debt with a personal loan may make sense. When doing the math, consider the interest rate, loan term and any fees to figure out whether you’ll be saving money over the life of the loan.
• You’ll be able to make payments: If the monthly payments are comfortably within your budget, a personal loan may be the right move. You shouldn’t take out a loan if you think you’ll have trouble making the payments.
• You need a longer repayment term: Many lenders let you choose a loan term. A longer term can lower your monthly payment and give you more time to pay off debt. Just be aware that a longer term may mean you pay more interest overall.
• You prefer the predictability of fixed monthly payments: With fixed interest and a fixed term, your personal loan payments will be the same every month.  You can even automate your payments to ensure you never miss a due date.

Balance transfer or personal loan: Which is right for you?

The right option will depend on your financial and personal circumstances. In general, a debt consolidation loan might make the most sense if you need more time to pay off debt or if you want a consistent monthly payment. A balance transfer card can be the right option if you anticipate being able to pay off your debt before the end of the promotional period or if you want the option for more flexible payments.

Whichever option you choose, it’s important to have a solid plan to pay off your debt and manage your finances going forward.

Citi offers personal loans to both existing Citi customers and new Citi customers that meet specific eligibility criteria, including an established credit and income history along with additional factors determined by Citi. If you think you could benefit from a Citi Personal Loan, apply online today.

Disclosure: This article is for educational purposes. It is not intended to provide legal, investment, or financial advice and is not a substitute for professional advice. It does not indicate the availability of any Citi product or service. For advice about your specific circumstances, you should consult a qualified professional.