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4 Ways to Determine If a Personal Loan or a Balance Transfer Is Best for You

Ben Luthi
If you're looking to consolidate your credit card debt, here are four questions you can ask to determine which option is best for you.

With high interest rates and low minimum payments, credit card debt can be financially crippling. But that doesn't stop people from running up a balance. On average, Americans carry $6,632 in credit card debt, according to a 2016 report by Experian.

With an average of 14.87% APR on credit cards, according to August 2017 data from the Federal Reserve, you're paying a heavy price to carry a balance.

If you're looking to consolidate your credit card debt to pay it off faster, you have two main options:

  1. A balance transfer credit card
  2. A personal consolidation loan

Here are four questions you can ask to determine which option is best for you.

1. How's Your Credit?
If you have good or excellent credit, you have a better chance of getting approved for a balance transfer credit card or a personal loan with a low interest rate.

If you haven't already, check your credit score to see where you stand. Having a credit score of 700 or above is ideal, but some lenders might still accept your application if your score is lower.

Here's the tricky part: if you get approved for a balance transfer credit card, you'll get the 0% APR promotion regardless of what your credit score is. But with personal loans, you could get approved but still not qualify for the lender's best interest rates.

In fact, you could be given a higher rate than what you're paying on your credit cards, which defeats the purpose of consolidating. So if your credit score is good but not excellent, you might be better off with a balance transfer card.

The good news is many personal loan companies allow you to prequalify for a loan with a soft credit check, which won't hurt your credit score. Through this process, you'll see what kind of interest rates you might get if you apply.

If your credit score is lower than 650, you might have a hard time getting approved for either option. In this case, you'll want to take these steps to improve your credit score before applying:

  • Make sure your credit report is accurate.
  • Clear up negative items like collection accounts and late payments.
  • Pay down your credit cards to lower your credit utilization ratio.

2. What Credit Limit Do You Need?
Balance transfer cards are usually more flexible with credit requirements than personal loans are, which can be helpful, but you have to watch out for the card's credit limit.

So if you have a lot of credit card debt, a balance transfer alone might not be enough. That's because you won't find out your credit limit until you've applied and been approved for the card. Even if you do qualify for a high enough limit, the transfer can hurt your credit score if the new balance takes up a large portion of your available credit on the new card.

Having a high credit utilization rate can hurt your credit, too. The ideal credit utilization—your balance divided by your credit limit—is below 30%. So if you transfer $6,000 to a card with a credit limit of $8,000, the resulting 75% credit utilization is high. Of course, if you already have a high utilization on your current credit card, it might not affect you much.

With personal consolidation loans, credit utilization doesn't apply. What's more, you can usually find out how much the lender will approve you for during the prequalification process. There's no guarantee you'll get enough to cover all your credit card debt, but at least you'll know what to expect before you apply.

3. How Much of a Monthly Payment Can You Afford?
One of the reasons paying off credit card debt can be hard is there's no set repayment period. Without a plan, it's easy to make the minimum monthly payment and add extra payments when you can, but that may not be enough.

Consolidating your credit card debt with a personal loan solves that problem. You'll get a set repayment period and a monthly payment schedule that helps you stay on track and pay off the loan by the end of the period.

However, depending on how much you owe and the personal loan interest rate, that set monthly payment could be difficult to fit into your budget.

For example, let's say you have $6,632 in credit card debt and you want to consolidate it into a personal loan with a three-year term and a 10.00% APR. In this scenario, your monthly payment on the loan would be $214.

If you can afford that payment and the interest rate is lower than what you're paying on your credit card, you can save money and time by consolidating with a personal loan. If you can't afford it, though, you might be better off consolidating a smaller amount or considering a balance transfer card. You can use an online payment calculator to do the math for your situation.

4. Are There Fees Involved?
Whether you opt for a balance transfer card or a personal loan, you might have to deal with fees. Balance transfer fees typically range from 3% to 5% of the amount you transfer. On the flip side, some personal loans charge origination fees, which can range from 1% to 6%.

Not all cards and loans charge these fees, though. As you're doing your research, keep an eye out for lenders who offer credit cards with no balance transfer fees and personal loans with no origination fees.

For example, you might qualify for a credit card with no balance transfer fee but not a personal loan with no origination fee (or vice versa), and that can make your decision for you. It might take a little extra time to find out, but you could save yourself a lot of money if you make the right financial choice.

Personal Loan or Balance Transfer: Which Is Better?
For many people, the lure of a 0% APR balance transfer promotion is a no-brainer.

If you're saving as much money as possible and you have an aggressive payoff plan, a balance transfer card could work. But you also should consider the card's credit limit constraints, as well as the fees and interest rates once the promotional period is over.

On the other hand, a personal loan could give you a structured payoff plan and a lower interest rate for the life of the loan. But make sure you can afford the monthly payment and qualify for a low enough interest rate.

In the end, you have to use your judgment to decide whether you should get a personal loan or a balance transfer credit card. Just make sure you actively search for ways to get rid of your credit card debt once and for all.