Balance Transfer Loan or Balance Transfer Credit Card? How to Choose

November 22, 2019

Feeling stuck in an ongoing cycle of credit card debt? We know how frustrating it can be to continually move debt from one credit card to another, making minimum payments but never reducing your overall balance. You may have tried balance transfer credit cards in the past—and you may be familiar with their restrictions, introductory periods, and other fine print. If you’re tired of the debt cycle, it could be time to consider a balance transfer loan to pay down your debt and start your journey toward financial freedom.

Balance transfer loans versus balance transfer cards

Balance transfer credit cards

A staple of the financial industry, credit card companies have used balance transfer cards as a way to attract new customers—or win back existing customers—for decades. In fact, you may have even received mail offering a 0% interest rate and no monthly fees for a short period of time (usually around 6-12 months).

Although balance transfer credit cards can sound like a great deal, they often come with a lot of hoops to jump through. Depending on your credit history, many offer low introductory rates up front, but come with high interest and fees after the promotional period expires. Frequently there are fees associated with the balance transfer itself—often around 3% of the total transfer amount.

Trickiest of all, when paying off a balance transfer credit card (or nearly any other credit card for that matter), your payments are usually applied to the items at the introductory rate (or lowest APR) first, leaving items with higher APRs as revolving debt on your card. What does this mean? You end up paying interest on top of interest, which can make getting out of debt feel next to impossible.

Tip: If you get a low-interest or no-interest credit card, especially from retailers like home furnishing or clothing stores, pay attention to the expiration date on your introductory rate. In many cases, if you don’t pay back the original balance in full by the expiration date, the deferred interest can come back—plus the interest you would have paid in the meantime. That means you’d be responsible for the remaining balance on the credit card, plus the original interest you would have paid on the entire balance, PLUS the interest the interest would have accrued. Yes, you read that correctly—they’re charging interest on interest. That could amount to hundreds—even thousands—of dollars on top of your original balance.

If this sounds overwhelming, don’t stress. Let’s look at a balance transfer personal loan next.

Balance transfer personal loans

Similar to balance transfer cards, a balance transfer loan also allows you to pay down high-interest debt and credit cards by consolidating them into one low monthly payment. But instead of using more revolving debt (as with a credit card) to accomplish this, you get a personal loan with a fixed term and a fixed rate. This means the APR you agree to when you apply is the same APR you will keep for the duration of your loan. You’ll never get a surprise notification that your rates have increased. And from the minute you accept your offer, you will know the exact date your balance transfer loan will be paid off. Since a balance transfer loan is not revolving debt, you’ll be able to circle the payoff date in your calendar.

Another benefit to balance transfer loans is they have no balance transfer fees. Although origination fees of 1-6% of the loan amount are typical, interest rates are often much lower than those on credit cards.

Deciding between a balance transfer loan or credit card

So when should you opt for a balance transfer loan versus a balance transfer credit card? As with most financial decisions, it depends. Try thinking about it like this:

A balance transfer credit card might work for you if

    you qualify for a 0% or very low introductory offer from a credit card company with transfer fees below 3%, and if you think you can pay down the entire balance before the introductory rate is over.

A balance transfer personal loan might be a better choice if

    you don’t qualify for one of those low introductory rates, if the transfer fee is higher than 3%, or you don’t think you can pay down the entire balance before the promotional period expires.

Still not sure which to choose?

Both balance transfer loans and balance transfer credit cards can help you consolidate debt, allowing you to make a single monthly payment instead of worrying about multiple bills and due dates from individual creditors. Which one you choose depends mostly on how quickly you are able to pay down your debt. Here’s a short recap of the benefits of both:

Benefits of a balance transfer loan for debt consolidation

  • Fixed, low interest rate that will not increase
  • Fixed pay-off period with a set end date
  • Better for paying over a longer period of time (typically 36 or 60 months)

Benefits of a balance transfer credit card

  • Low introductory rate
  • Better for paying over a short period of time (often less than 12 months)

If you think a balance transfer loan is right for you, LendingClub can help. Get started by checking your rate today.

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