What’s better for debt consolidation: a balance transfer card or a personal loan?

Richard Barrington
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Richard Barrington
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What’s better for debt consolidation: a balance transfer card or a personal loan?
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Balance transfer credit cards and personal loans can both be effective tools for debt consolidation. The right choice depends on how you intend to approach debt consolidation.

This article will explain the issues that determine which will be the most cost-effective way of financing your debt consolidation.

What is debt consolidation?

In its simplest form, debt consolidation means exchanging multiple existing debts for one new debt.

For example, suppose you had balances on three credit cards plus a car loan. Each of those debts would likely require a different monthly payment, and chances are each would have a different due date. The more payments you have, the harder it is to keep track of them. If you miss one or two payments, late fees and credit score damage can make your debt problem worse.

So, you could take out a personal loan and use the proceeds of that loan to pay off your existing debts. Or, you could transfer those debt balances onto a balance transfer card. In either case, you’d now have just one monthly payment instead of the four you had previously.

That would make managing your payments simpler, but ideally debt consolidation should be able to do more than that. Debt consolidation can be most beneficial if it lowers the cost of your debt.

Both balance transfer cards and personal loans have the potential to lower the cost of your debt by reducing the interest you’re paying on that debt. However, each has potential drawbacks that can make them less cost-effective.

So, you need to look before you leap into debt consolidation. Having a detailed plan for how you would use any debt consolidation option will help you identify the costs and create a debt reduction schedule that you can afford.

Doing this depends on the specific characteristics of the balance transfer card or personal loan that you choose.

Pros and cons of a balance transfer card for debt consolidation

Balance transfer cards offer a special low interest rate for a limited, introductory period. You can transfer existing debt balances to a balance transfer card to save on the interest you’re paying on those balances.

The following are some pros and cons of taking this approach to debt consolidation:


  • Balance transfer cards frequently charge no interest for an introductory period, typically 12 to 18 months.
  • Transferring multiple debts onto a balance transfer card reduces the number of monthly payments you have to keep track of, and can lower the total minimum monthly payment you have to make.
  • While a minimum monthly payment will be required, the repayment schedule is flexible and so can be adjusted somewhat to fit your needs.
  • You can use the same card to make new purchases, if you want to continue to keep all your debt in one place.


  • Balance transfer fees can erode the interest rate savings of balance transfer cards.
  • Credit cards have undefined repayment periods which can prolong your debt and cost you more in the long run.
  • The interest rate after the introductory period may be higher than the rate on your existing cards.
  • The interest rate on new purchases may be higher than the rate on your existing cards.
  • Opening a new credit account may have an adverse effect on your credit score.

See more pros and cons of balance transfer credit cards.

Pros and cons of a personal loan for debt consolidation

Personal loans generally have preset repayment terms, including the interest rate, monthly payment and repayment period.

The following are some pros and cons of using a personal loan for debt consolidation:


  • Personal loan interest rates are generally significantly lower than credit card interest rates.
  • Paying off multiple existing debts with a personal loan can make monthly payments easier to manage.
  • The defined repayment schedule of a loan helps you to plan ahead and budget to pay off your debt within a certain amount of time.
  • Diversifying your debt between installment debt (loans) and revolving debt (credit cards) can be good for your credit score.


  • Unlike balance transfer cards, personal loans charge interest throughout the repayment term.
  • Application fees and closing costs can erode the interest rate savings from personal loans.
  • Applying for and opening a new loan may have an adverse effect on your credit score.
  • People with low credit scores may not be able to qualify for a personal loan at a reasonable interest rate.
  • Longer repayment periods may lower your monthly payments at the expense of raising your long-term costs.

See more pros and cons of debt consolidation services.

Choosing between a personal loan and balance transfer card

While fees should also factor into your decision, the key to deciding between a personal loan and a balance transfer card is the length of the 0% period on any balance transfer card you’re considering.

First, you need to figure out how long it will take you to pay off each type of loan. Create a budget so you know how much money you’ll be able to put towards debt repayment each month. Then figure out how many months it would take you to pay off a personal loan or a balance transfer card.

If you can pay off the debt within the 0% period, it’s an easy decision. Because you wouldn’t have to pay any interest on the balance transfer card in that situation, it’s likely to be more cost effective than a personal loan.

If you can’t pay off the debt within the 0% period, the decision becomes more complicated. Once that period expires, it’s likely that the personal loan will have lower interest rate than the balance transfer card. It then comes down to how long after the 0% period expires it will take you to pay off the debt.

Figure out the total principal, interest and fees you would pay for each option over your planned repayment period. This will tell you whether the money you save on interest during the 0% repayment period would make a balance transfer card the better option, or whether the lower interest rate on personal loan after that period would make a loan more cost-effective in the long run.

Keys to making debt consolidation work

Besides making the right choice between a balance transfer card and a personal loan, here are some keys to making debt consolidation work:

  • Consider all costs. While interest rates are a big factor, be sure to consider all the fees involved in refinancing your debt. These include any annual fees and balance transfer fees on on a balance transfer card, as well as application fees and closing costs on a personal loan. Also, if you are thinking of refinancing loan debt, be aware that some loans charge early repayment fees.
  • Consider the interest rates on your existing debt. Though it would be convenient to consolidate all your debt into one loan or credit card balance, it might not be cost effective. High-interest credit card debt is a prime target for debt consolidation. However, when it comes to relatively low-interest debt like mortgages or student loans, you may find it’s not cost effective to refinance this debt. So, compare each debt separately against your debt consolidation options.
  • Work out a budget for payments. Before you consolidate debt, work out a detailed budget so you know how much you’ll be able to pay every month. This will tell you how long it will take you to pay off your debt, and that’s a key to deciding if debt consolidation is worthwhile. If you could pay your debt off within a couple months, it may not be worth the upfront costs of consolidation. At the other extreme, if it will take you more than a couple years, it may make a personal loan more cost effective than a balance transfer card.
  • Stick to your repayment schedule. Again, timing is the key to figuring out the cost of debt consolidation. Once you’ve figured out a repayment schedule that would make debt consolidation cost effective, be sure to stick to it.
  • Restrict future borrowing. This may be the most important point of all. If all debt consolidation does is free up your credit limits for further borrowing, you could end up in worse shape than when you began. Debt consolidation should be part of an overall debt reduction strategy. The key to that is a budget that doesn’t depend on continued borrowing.

Best case, debt consolidation can help organize your payments and allow more of those payments to go towards reducing what you owe instead of interest payments. To make this work though, it’s vital to plan ahead.

Richard Barrington
Cardratings Contributor

Richard has over 30 years of experience in financial services, including 23 years with the investment management firm Manning & Napier Advisors, Inc., where he led the Marketing Group and served on the firm’s Investment Policy Group and Executive Group. Over the years, Barrington has...Read more

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