Debt consolidation loan vs. balance transfer: Which is right for you?

A debt consolidation loan and balance transfer can help you consolidate high-interest debt. Learn how they compare. (Shutterstock)

Debt consolidation combines multiple debts into a single account. It can help you save money, lower your monthly payments, and streamline your payoff process. While you can consolidate debt in multiple ways, debt consolidation loans and balance transfers are the most common. 

Here’s what you should know about each one so you can determine the ideal debt consolidation strategy for your unique situation. 

If you need a loan to consolidate high-interest debt, Credible makes it easy to see your prequalified personal loan rates from various lenders, all in one place.

• Debt consolidation loan vs. balance transfer: What’s the difference?
• Pros and cons of a debt consolidation loan
• Pros and cons of a balance transfer
• What to consider when consolidating debt
• Where to get a debt consolidation loan
• Where to get a balance transfer card

Debt consolidation loan vs. balance transfer: What’s the difference?

Both debt consolidation loans and balance transfer credit cards are credit products you can use to consolidate other higher interest debts. Here’s a closer look at how each one works. 

What is a debt consolidation loan?

A debt consolidation loan is a type of unsecured personal loan. If you take one out, you’ll receive a lump sum of money up front. Then, you’ll repay what you borrow through fixed monthly payments over a set period of time. While loan amounts vary, they can range from $1,000 to $100,000. 

If you have various types of debt that might take several years to pay off, a debt consolidation loan is worth considering. 

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What is a balance transfer credit card?

Balance transfer credit cards allow you to transfer balances from your current cards to a new card, typically with a 0% APR introductory period that may be anywhere from six to 18 months. If you pay off all your debt before this introductory period comes to an end, you can save a lot on interest. But keep in mind that once the period ends, you’ll start accruing interest on the card’s remaining balance, and credit cards can have high interest rates. 

If you have a lot of high-interest credit card debt and you can pay it off during the introductory period, a balance transfer credit card may make sense. 

Pros and cons of a debt consolidation loan

Before you choose a debt consolidation loan, consider these benefits and drawbacks:

Pros

• You can use a debt consolidation loan to consolidate multiple types of debt, like credit card debt, medical bills, and other personal loans.
• Some lenders will pay your creditors directly so you don’t have to, simplifying the debt-payoff process.
• Compared to a credit card, a debt consolidation loan usually comes with a lower interest rate.
• You’ll have a clear payoff date and can budget for it accordingly.

Visit Credible to compare personal loan rates from various lenders, without affecting your credit score.

Cons

• If you don’t have the best credit, you may find it difficult to land a lower interest rate than the interest rates you’re currently paying.
• Some lenders charge origination fees, prepayment penalties, and other fees when you take out a debt consolidation loan.
• There’s no 0% APR introductory period like some credit cards offer.
• If you don’t make your payments on time, every time, your credit can take a hit.

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Pros and cons of a balance transfer

Here are some advantages and disadvantages to think about before you decide on a balance transfer:

Pros

• You may qualify for a 0% APR introductory period, which can save you hundreds or even thousands of dollars in interest.
• Some cards offer rewards, like cash back and travel points.
• Opening a new card can lower your credit utilization ratio (how much credit you’re using compared to how much available credit you have) and in turn improve your credit score.

Cons

• If you don’t repay your debt before the 0% APR period ends, you could face hefty interest charges.
• Some cards charge a balance transfer fee of 3% to 5% of the amount you transfer.
• You might not qualify for a balance transfer credit card unless you have good credit.

What to consider when consolidating debt

As you compare a debt consolidation loan and balance transfer, consider these factors: 

• Interest rate (amount and type) — The interest rate is the cost you’ll pay to borrow money. It can be fixed and remain the same or variable and fluctuate based on market factors. The lower the interest rate, the better.
• APR — APR stands for annual percentage rate and refers to how much you’ll actually pay for the loan or credit card, including both your interest rate and any fees. If you qualify for a balance transfer card with a 0% introductory period and can pay off your balance before it ends, a balance transfer may be the more affordable option.
• Fees — Fees for a debt consolidation loan may include origination fees and prepayment penalties. A balance transfer fee of 3% to 5% of the amount you transfer is common with a balance transfer credit card.
• Credit score requirements — You’ll likely need good or excellent credit to qualify for a balance transfer credit card or personal loan. The good news is some personal loan lenders have more lenient borrowing criteria.
• Types of debt you’re consolidating — You can use a personal loan to consolidate multiple types of debt, like medical bills and credit cards. A balance transfer credit card, however, is designed for high-interest credit card debt.

Where to get a debt consolidation loan

You can get a debt consolidation loan at a bank, credit union, or online lender. While banks and credit unions tend to offer competitive rates, they usually have stricter requirements than online lenders. Also, you must join a credit union before taking out a loan from one. 

If your credit score is preventing you from getting approved for a debt consolidation loan, you may want to apply with a cosigner who has good credit or take the time to improve your credit before you apply. 

If you’re ready to apply for a debt consolidation loan, Credible lets you quickly and easily compare personal loan rates to find one that suits your needs.

Where to get a balance transfer card

Many banks and credit card companies offer balance transfer credit cards. If you’re having trouble qualifying for one, check your credit reports and dispute any errors. Also focus on making your payments on time and do your best to pay down some of your credit card debt to improve your credit utilization.