Mar 18, 2024

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If you are looking to simplify your finances and free yourself from higher-interest credit card debt, you have many options to explore. Among the choices to consider are balance transfers and personal loans, but how do you choose?

Both can be beneficial, depending on your personal situation, but they also differ in important ways. Read on to learn how they compare so you can make an informed decision and maximize your savings.

What is a balance transfer?

A balance transfer is the act of moving the amount you owe from one or more accounts to a different one. This is commonly done for credit cards when borrowers move multiple credit card debts onto one card.

How do balance transfers work?

To conduct a balance transfer, you move debt from one credit card, typically with a high interest rate, to another credit card that offers a lower interest rate. Balance transfers are often used to help you save money on interest and potentially let you pay off your debt sooner.

Is balance transfer a good idea?

Balance transfers might work well for smaller debts you can pay off quickly, but you should make sure it is the best choice for your overall finances. There are many aspects to a balance transfer, and each one should be considered carefully.

Borrowers often use a balance transfer to move the amount they have borrowed on one or more credit cards to another credit card account with a lower interest rate or better repayment terms. For example, you might shift high-interest credit card debt to a card with a 0% introductory annual percentage rate (APR), or to a personal loan with a fixed repayment schedule.

If you have multiple accounts, a balance transfer might also make it easier to manage what you owe by streamlining your payments into one account.

Keep in mind that the introductory rate will end

A balance transfer may be a good way to consolidate your debt if you can pay off the balance on the new card before the promotional interest rate expires. If you do not pay the balance in full before the promotional rate ends, the APR will change to the regular rate stipulated in the terms, which might be higher than the rates you are currently paying. That might put you back where you started: with high-interest debt you may struggle to pay off.

Make sure you can afford your monthly payment

One way to determine if a balance transfer might work for you is to figure out how much you are able to pay each month. You can then divide your total debt by that monthly payment amount. If you can afford to pay the balance in 12 payments, for example, transferring to a card offering a low APR for a year might be right for you, as long as you don’t keep borrowing from the credit card account.

By transferring your revolving balances to a fixed-rate, personal installment loan, you can choose the number of months you want to pay off the debt in. At Discover® Personal Loans, for example, you can choose from multiple repayment options to fit your budget—36, 48, 60, 72, or 84 months.*

Be sure to consider any fees

If you are looking into a balance transfer, keep in mind that you may encounter fees that are added to your balance and can accumulate quickly. Remember, you will typically have to pay a fee for each credit card balance you transfer, which might range from 2%–5% of the transfer amount. In addition, be careful to check if the new card has an annual fee, as that might completely offset the money you are hoping to save on interest.

Double-check your credit limit

You should also make sure the credit limit on your new card is high enough to handle the balances you want to transfer. For example, $20,000 worth of debt might be too much to transfer to a new card. Some cards might also restrict the amount you transfer to 75% of the credit limit available to you.

What is a personal loan?

personal loan is a type of installment loan that is paid in a lump sum to the borrower and is then repaid in one set regular monthly payment over the loan repayment term.

How do personal loans work?

To start a personal loan, you need to figure out what loan amount is needed to cover your debt and determine how many months you want to pay it off. Once you have that information you can choose a lender and apply for a personal loan. If approved, the full amount of the loan is available as a lump-sum payment.

Is a personal loan a good alternative to a balance transfer?

Personal loans are often used for debt consolidation or to pay for large or unexpected expenses. It is important to do your research when considering a personal loan, as they have several features you will want to compare against a balance transfer as a solution for managing higher-interest debt.

Look for a fixed interest rate

Personal loans do not typically offer 0% introductory interest rates . You usually get a fixed APR though, so your interest rate and monthly payment will not change over the life of the loan. Because you choose the repayment term and monthly payment that fits your budget, you can enjoy peace of mind knowing exactly when you will have this loan paid off.

Check for a range of potential fees

Personal loans may work well for higher-interest credit card consolidation, but it is still wise to research and compare lenders and to minimize your costs. Some lenders charge origination or other fees, for example, while others, like Discover Personal Loans, don’t charge origination fees, closing costs, or prepayment penalties.

Consider the amount you need to borrow and repayment terms

Because many lenders offer loans only in larger amounts, a personal loan might be an ideal way to consolidate larger debts that will take you more than a year to pay down. With a Discover personal loan, you can apply for any loan amount from $2,500 to $40,000. You can also calculate your monthly payment to ensure that it fits into your budget.

Will a balance transfer or personal loan impact my credit?

Both balance transfers and personal loans might affect your credit score. Either one could be beneficial if they help you repay your debt in a timely manner. Opening new credit cards and transferring balances to them, however, may also impact your credit score by reducing the average age of your revolving credit. In either case, applying for a new credit card or personal loan will trigger a hard inquiry, which might cause your score to dip temporarily.

Personal loans might help your credit health, however, by transferring some of your revolving debt to an installment loan. Revolving loans, such as credit cards, are considered one category in your credit report. Installment accounts, including personal loans, car loans, student loans, and mortgages, are grouped in another category. Demonstrating an ability to balance payments among different types of loans may show that you handle your debt responsibly.

Is a balance transfer or a personal loan better for you?

The answer depends on which one may do more to help you reach your financial goals. Because both personal loans and credit cards are unsecured, you don’t need to put up any collateral to get your money.

For lower debt balances that you can comfortably pay off in one to two years, a balance transfer might be a smart solution. If you get an introductory 0% APR offer, you might save on interest in the short term.

For higher debt balances, a personal loan might be the better option. A fixed interest rate, one set regular monthly payment, and flexible loan terms may help you pay down debt and still allow you to save. In fact, 87% of surveyed customers said they saved money by consolidating debt with a Discover personal loan, and nearly half said they saved an average of $396 per month.**

If you are thinking about consolidating debt and looking to save money, see what you might save in interest when you consolidate higher-interest debt with a loan from Discover Personal Loans.

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* For example, if you get approved for an $18,000 loan at 13.99% APR for a term of 60 months, you’ll pay just $419 per month .

All figures are from an online customer survey conducted September 14 to October 3, 2023. A total of 1,191 Discover personal loan customers were interviewed about their most recent Discover personal loan with 550 of them using the funds to consolidate debt. All results @ a 95% confidence level. Respondents opened their personal loan between January and July 2023 for the purpose of consolidating debt. Agree includes respondents who ‘Somewhat Agree’ and ‘Strongly Agree’.