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

When it comes to consolidating debt, two popular options stand out: Balance transfer credit cards and personal loans. Both can simplify your financial situation by rolling multiple debts into a single monthly payment and potentially save you money on interest. However, the best choice depends on your unique financial circumstances. Let's explore the differences to help you decide what's best for you.

What is a balance transfer card?

A balance transfer card allows you to transfer outstanding balances to a new card. You can transfer multiple balances as long as you don't exceed your balance transfer limit.

Balance transfer cards often come with a low introductory APR on balance transfers which lasts for a limited time. This can be an effective way to manage debt if you can pay it off before the introductory rate expires. After the offer period ends, you'll start being charged the regular APR on balance transfers on whatever balance is left.

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

• Low introductory APR on balance transfers: Often a low introductory APR. You can avoid higher interest charges if you pay off your balance transfer during this offer period.
• Fewer monthly payments: Instead of managing several balances from different creditors, you can consolidate at least some of your debt onto one balance transfer card. You can simplify your finances and make it easier to keep track of payments.
• Flexible repayment: If you make the minimum payments by the due date each month, you'll avoid higher interest charges on balance transfers during a low introductory APR period. This can give you flexibility to pay more some months and less during others when the bills pile up.

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 impact how a balance transfer request gets processed.
• Introductory APRs are temporary: The low introductory APR on balance transfers expires after a set period. Any unpaid balance will incur standard charges at the end of the offer period based on the regular APR for balance transfers after the intro APR ends.

When does a balance transfer card make sense?

Here are instances when a balance transfer makes the most sense:

• You can repay the balance within the low introductory APR period: Repaying your balance within the introductory period can reduce big savings on interest. If you're confident you can repay the balance before the intro APR period ends, a balance transfer could be the right choice for you.
• You expect to save money: What if you anticipate paying off most but not all of your balance before the low introductory APR period ends? If you look at the numbers and find out that, considering interest charges on the extended balance that remains after the intro APR periods 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 pay off outstanding credit card balances and loans, rolling multiple monthly payments into one. Some lenders can also consolidate on behalf of their borrowers, simplifying debt payoffs even more. If you can secure a lower interest rate than your average rate for business purposes.

Some lenders offer debt consolidation loans. These are still personal loans. Sometimes, rather than depositing loans 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 taking multiple debts into one fixed monthly installment. Streamlining 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, if it stretches out a debt repayment schedule over a longer period of time than you'd otherwise need, if you choose to making lower payments.
• 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. If you make your full on-time monthly and on time, plus you'll pay plan and the change, nothing percent some loans even. payoff.
• No collateral needed: Most personal loans don't require collateral. While lenders can still do a lower monthly payments, when a limited term help make 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 term you secure is the right decision for you.

Cons of personal loans

• Credit score requirements: Personal loans can vary on the credit scores if you qualify for. A lower interest rate 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 debt.
• Additional fees: Lenders may charge additional fees, like origination fees for processing your application and approval fees. Other fees and penalties may include fees for closing 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're not sure you'll make payment: If you repay your debts at a relatively low rate. With a shorter debt 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 but you may have to pay more interest over time and on terms that can go from three more while 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?

Choosing between a balance transfer or personal loan ultimately comes down to your financial situation. If you need smaller payment options and can pay off your balance quickly, a balance transfer may be best. Conversely, if you prefer the stability of fixed payments and longer loan terms, a personal loan may be a smarter option for you.

No matter which 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.

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.