Balance Transfers vs Personal Loans: Here Is the Difference

Rochel Maday

Rochel Maday

Published on: 27 September, 2021

Updated: 09 November, 2023

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Between mortgages, student debt, and credit card purchases, the average American is over $90,000 in debt. Being in debt is stressful. Between keeping up with monthly minimum payments, tracking rising interest rates, and protecting your credit score, it may seem like an impossible task to rid yourself of seemingly insurmountable debt.

Balance transfers and personal loans are two great options to consider when tackling debt or trying to avoid suffocating interest. Here’s why you might need each one: 

  • If you’re balancing multiple credit card accounts and want to focus on debt management, a balance transfer is a great option to consider (the best balance transfer scenario includes a promotional window with a low interest rate).
  • If you’re coming up against an uncommon but substantial expense, like a wedding or major home renovation project, a personal loan provides instant access to cash you can use as you see fit.

To understand which is best for you, let’s dive into balance transfers and personal loans a little more.

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What Is a Balance Transfer?

A balance transfer is a way to manage credit card debt. The goal of a balance transfer is to quickly pay off a balance, especially one that’s hit your credit limit, while avoiding interest. In some scenarios, transfers are made to take advantage of rewards offered by a new card company.

The balance transfer credit card process looks something like this:

  1. A credit card holder with a balance on one or multiple cards seeks out a credit provider offering balance transfers.
  2. They submit the required information to apply for a transfer.
  3. If approved, they review the proposed terms.
  4. Should they decide to move forward on a balance transfer offer, all necessary paperwork is completed.
  5. The transfer takes place and any applicable balance transfer fees are applied to the account.
  6. The new terms take effect and a payment schedule begins.


Is a Balance Transfer a Good Idea? 

Balance transfers are an appealing approach to , especially to those stuck under high credit card interest rates. While there are certainly benefits to enjoy, there are also disadvantages to consider when transferring high-interest credit card debt to a new credit card.

Pros of Balance Transfers

  • The average credit card interest rate is 16.22%. In what is likely its most appealing benefit, many balance transfers offer a promotional window with a 0% interest rate, usually lasting between 12 and 24 months.
  • Not everyone transfers a balance solely for a low fixed interest rate. Some switch a card’s balance to a new credit provider offering better rewards or enhanced cash-back programs
  • If you have more than one credit card, transferring multiple balances to a single account can simplify your personal finance and debt management plan.

Cons of Balance Transfers

  • If you’re unable to make your payments on time or pay off your entire balance before the introductory period closes, you could end up paying a higher interest rate than your original card included. You could also end up with more debt than you started with if you continue to charge purchases on transferred accounts.
  • Balance transfers can come at a price. Transfer fees can be as high as 5% of the total amount transferred. Additionally, your credit score can take a hit when applying for a transfer.

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If your credit history is less than perfect, you may not be approved to transfer your entire balance. You may also be denied entirely. If that's the case, you may want to look into ways for building your credit before applying. Kovo's Credit Builder program is an amazing option if you're struggling to get the credit score you need.

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Who Should Consider a Balance Transfer?

This debt management approach isn’t right for everyone. But if you tick most of the boxes below, transferring or consolidating your credit card balances via a balance transfer could be a smart financial decision.

A balance transfer candidate should:

  • Have a credit card balance with difficult-to-manage payments and/or high-interest rates 
  • Have good or excellent credit in order to qualify for 0% interest promotional windows and voided balance transfer fees
  • Have a cash flow that matches proposed payment terms to ensure the balance will be paid in full within the promotional window
  • Be committed to eliminating debt

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What Is a Personal Loan?

A personal loan is a one-time cash payment from a lender to a borrower. Terms vary by loan, spelled out in the loan’s , and borrowers may use the money for home renovations, to pay off debt, or for one-time expenses like vacations or weddings. Lenders can be banks, credit unions, or even a friend or family member. 

A personal loan process often looks like this:

  1. A borrower seeks out and applies with a lender.
  2. Terms are discussed, negotiated, and ultimately agreed upon.
  3. The lender distributes the agreed loan amount to the borrower, enacting the loan.
  4. The borrower makes payments, with or without interest, until the life of the loan has expired.

Is a Personal Loan a Good Idea? 

Personal loans are a type of installment loan. Personal loans offer several advantages, making them an option for just about anyone in need of a quick line of credit. But there’s also fine print to be aware of. 

Pros of Personal Loans

  • Personal loans are flexible and versatile. Borrowers with good credit have a multitude of lender options. This means they can find a loan with terms that match their needs, like a low introductory APR. The funds can also be used at their discretion.
  • Personal loans offer lower interest rates compared to other types of loans. For example, the average personal loan interest rate in 2021 is as low as 9.3% while used car APRs for the same survey period can be as high as 21.07%.  
  • Personal loans are simple to understand. Once a borrower understands the total amount being loaned, when it needs to be repaid by, and what the origination fee and interest rate are, there are very few risks for surprises for borrowers.

Cons of Personal Loans

  • Personal loans can come with higher payments and shorter repayment windows
  • Personal loans can be dangerous for over-spenders. The cash can feel like a windfall while it’s being spent and leave borrowers unprepared for payment terms when the time comes.
  • Personal loans are not ideal for those with poor credit. If you have a low credit score and are still approved for a personal loan, you can expect an exceptionally high interest rate. This is one reason why securing a personal loan from friends or family members is often preferred over a financial institution.

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Who Should Consider a Personal Loan?

Personal loans are a great way to secure cash at a low-interest rate without the temptations of a credit card. If you meet the following criteria, a personal loan could be for you.

A strong candidate for a personal loan typically has these qualities:

  • Needs cash for a big purchase or to pay off different types of debt
  • Has good credit to avoid high interest rates
  • Has the cash flow to meet financial obligations before repayment period ends
  • Has a willing lender they trust

In addition to having a willing lender, borrowers should also make sure their loan is taking place through a secure platform. For example, Pigeon (the platform you are reading this article on) is a software tool that enables interpersonal loans, so anyone can get a loan from a friend or family member with ease, trust, and security.

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Balance Transfers vs. Personal Loans - Which Is Right for You?

You know that your finances could benefit from either a balance transfer or a personal loan. The question is, which is the better option? 

The answer depends on your unique financial situation. A meeting with a financial advisor can be beneficial (in fact, we highly recommend it because #wearenotfinancialadvisors). But if you’re searching for instant clarification, here are a few scenarios to consider.

As long as you crunch all the numbers (i.e., not just your monthly payment but the total cost of repaying the transfer/loan, including fees, interest, and repayment terms) and understand what you’re agreeing to (i.e., the fine print), you should have all the information you need to make an informed decision between a balance transfer and personal loan. 

It goes without saying that all available options should be explored when trying to pay down debt or tackle a big expense. Remember, financial institutions aren’t your only resource. There are safe ways to borrow from friends and family that can be more beneficial than going with a corporation.

Bottom Line

Both balance transfers and personal loans can have a positive impact on your financial situation, especially if you’re trying to pay off student loans or tackle a large amount of debt. They’re even more effective when they offer an interest-free promotional period or a low annual percentage rate. If you’ve been discussing the possibility of taking out a personal loan from a friend or family member, see how we can help simplify and secure the process of .

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About the author

About the Author

Rochel Maday


Rochel Maday is a financial writer for Pigeon, specializing in personal finance, investing, and budgeting. With a passion for empowering people to take control of their finances, Rochel offers insightful and actionable advice through her engaging writing style. Her extensive background in finance and business makes has made her a trusted source for the Pigeon community and readers looking to improve their financial literacy.