Balance transfer or personal loan?

As a general rule of thumb, balance transfer credit cards work best for smaller debts you can pay off relatively quickly, whereas personal loans are often better for larger balances that might take a few years to pay off.

That said, every debtor’s situation is different, and I strongly recommend reviewing these 5 key factors below before you choose either a loan or a balance transfer to help you consolidate and pay off your debt.

More: Should you do a balance transfer?

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Factor #1: What are the interest rates?

When trying to decide between a balance transfer versus personal loan, the first thing you should do is compare the interest rates of both to the current interest rate on your debt.

If you expect to pay the balance you owe within a few months and your current interest rate is only 2% higher than that of a personal loan or credit card for balance transfers, you might want to keep your debt where it is. However, if it’s going to take you longer to pay off your debt and you can reduce your interest rate by 3% or more, it’s probably worth it to either transfer your debt to a balance transfer card or pay it off with a personal loan — whichever offers the lower interest rate.

Factor #2: How quickly can you pay off your debt?

One of the main differences between a balance transfer card and a personal loan is that the super-low interest rates associated with a balance transfer credit card might be offered for a promotional period only. This promo period can range from as short as 6 months to as long as 2-3 years. For this reason, balance transfer cards often work best for lower debt balances that you can pay off quickly. But before you choose a balance transfer card, be sure to read the fine print. Sometimes the interest rate will skyrocket to a rate that’s even higher than traditional credit card interest rates (20% plus) at the end of the promotional period.

More: Best balance transfer credit card offers in Canada

If your debt is only a few thousand dollars or less that you can pay off quickly, choose a balance transfer card with a low-interest promotion. However, if you owe more than $5,000 or it will take you a few years to pay off your debt, a personal loan might be a better fit. With a personal loan, the interest rate is usually fixed for the lifetime of the loan. It may be slightly higher than those offered for a balance transfer card promotion, but it will at least be the same for the entire loan period.

More: Best personal loans in Canada

Factor #3: How much flexibility do you need?

One of the great things about balance transfer cards is that you can usually pay down as much of your balance as you want on your own schedule. You can make consistent payments every month, or if you receive an unexpected cash windfall, you can put it all toward your debt as a lump sum. There are typically no penalties or fees for paying your debt off early.

Likewise, if you’re able to put $500 toward your debt one month, but only $100 the next month, the credit card company won’t bat an eye. As long as you make the minimum payment, the rest is up to you, which puts much less pressure on your budget than a set-in-stone payment schedule. Balance transfer credit cards offer the most flexibility in your repayment terms to tackle your debt.

Depending on the type of personal loan you get, you may or may not be able to pay the balance off on your own terms. A fixed term loan means you have to pay off the balance during a specific timeline. You cannot pay extra to shorten the timeline, and you can’t increase your payback schedule if you ever need to skip or make a lower payment. For this reason you should take extra care in selecting a personal loan with payment amount and frequency terms that fit your budget.

More: Should I use a loan to pay off my credit card debt?

Factor #4: Are there any fees to transfer the balance?

A balance transfer credit card might boast an alluring 0% interest rate, but take a closer look and you might see a 3% balance transfer fee, too. This means if you were to transfer a $4,000 debt to a balance transfer credit card, the first thing you’ll see on your statement is a $120 charge. When you’re paying off debt, the last thing you want to do is add to it!  If you have a small debt balance that you can pay off in 6 months or less, chances are the fees to transfer it to a low-interest credit card might be comparable to the interest you’ll accrue by just leaving it where it is.

Don’t forget to look for annual fees on the credit card, too. These can range anywhere from $20 to $150, which again is not what you want when you’re trying to be debt-free. Unlike balance transfer cards, personal loans generally do not have any fees to set up or transfer balances.

Factor #5: Will you find yourself in debt again?

If you’re prone to making unnecessary purchases on credit cards, a personal loan is probably a better option than a balance transfer card.

Opening another credit card to pay off existing credit card debt leaves the original credit cards empty… and free to accumulate debt again. But what’s more, you’ll also have the option to make purchases with the balance transfer card, of which you should be very careful. Many balance transfer cards charge a completely different (often higher) interest rate for purchases than they do for the balances transferred.

If you choose a personal loan, you’ll still end up with paid-off credit cards that you’ll need to use responsibly, but the loan won’t give you any new credit to use/misuse. As you make payments towards your personal loan, your payments will lower your debt but not give you new spending power. For this reason, a personal loan is a better option if you’re worried about not having the discipline to stay out of credit card debt.

Final word

The above factors should always be considered when deciding whether or not to take out a loan, transfer a balance to a credit card, or leave your debt as it is. No matter what, always compare the different options out there rather than going with the first balance transfer card or personal loan that you come across.

Does the interest rate sound too high? You can probably find something lower. Are you surprised by the amount it will cost just to transfer the balance? You can probably find a card that charges less in fees. Always shop around, and make sure you consider both the debt you want to consolidate and your behaviour and habits as a borrower.

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Bridget Casey is the award-winning entrepreneur behind Money After Graduation, a Canadian financial literacy website aimed at 20 and 30-somethings. She holds a BSc. from the University of Alberta, and an MBA in Finance from the University of Calgary. She has been featured as a millennial financial expert by Yahoo! Finance, TIME Magazine, Business Insider, CBC and BNN. Bridget was recognized as one of Alberta's Top Young Innovators in 2016.


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