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Balance transfer card or personal loan: which is best for you?

Should you pay off your debts with a personal loan, or put everything on a balance transfer card? This handy guide will help you decide.

26 May 2023Andre Spiteri 3 min read
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Image by Kyle Glenn on Unsplash

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Should you pay off your debts with a personal loan, or put everything on a balance transfer card? This handy guide will help you decide.

If you’re juggling several debts, combining them might help you feel more in control. One monthly payment should be easier to manage than three or four different payments. And if you’ve signed up to ClearScore, you can browse the best balance transfer card and personal loan deals available to you on your Offers page. Some of these offers could make your payment more affordable.

But what’s the best way to consolidate your debts? Should you go for a balance transfer card? Or is a personal loan a better option?

First things first, it’s worth writing down all the debts you want to consolidate. Are they credit card debts? Or does your list also include other types of debt? It depends on the lender, but most balance transfer cards only let you pay off credit card debt.

By contrast, when you take out a personal loan, your lender deposits a lump sum into your account which you can use as you like. This means a personal loan is the way to go if you want to consolidate in-store credit, personal loans, loans from family and friends, and other kinds of debt.

Depending on your financial situation, lenders may offer you 0% interest on balance transfer cards for an introductory period, usually between 12 and 24 months. This makes balance transfers a great option for smaller debts: if you can clear your balance during the introductory period, you won’t pay any interest.

The catch is that interest rates usually shoot up once the introductory period ends.

Your interest rate (and whether you qualify for a 0% offer) will depend on your credit history, current financial situation, and any past dealings you’ve had with the lender. That said, typical APRs (annual percentage rates) on balance transfer cards start at 21.9% and go up to 29.9% or higher.

In comparison, while personal loans don’t usually have 0% introductory offers, they tend to have lower interest rates. So if your debt is bigger and you need a few years to pay it off, a personal loan might be cheaper.

You can find out how much a balance transfer could save you using our balance transfer calculator.

Balance transfer cards generally have more flexible payment terms than personal loans. While you have to make a small minimum payment each month — if you don’t, your lender may start charging fees and interest — you can pay more when you can afford to and switch back to the minimum payment if you’re having a tough month.

You can also clear your balance at any time without paying an early repayment fee.

In comparison, personal loans are much more structured. When you apply for a loan, you must decide how much you’ll pay each month and for how long (typically between one and five years). Monthly payments are also higher than the minimum repayment on a balance transfer card.

More importantly, monthly repayments stay the same over the life of your loan. So if you think your situation might change, for example because you’re considering leaving your job to start your own business, a personal loan might not be right for you.

As a rule, you can expect to pay a ‘balance transfer fee’ or ‘handling fee’ of between 1% and 3% when you transfer a balance. So if you were transferring £2,000, that’d be a £60 fee. This fee applies even during a 0% interest offer.

Personal loans also carry fees. Some lenders may charge an arrangement fee to cover the cost of setting up the loan. This can be a separate fee, or it could be built into your monthly repayment, in which case you’ll pay interest on it.

You might also have to pay an early repayment fee if you decide to clear the loan sooner than you’ve agreed with your lender.

Fees can make your loan a lot more expensive, so it’s worth doing the maths before you decide.

Balance transfer cards and personal loans both help put your debts in one place, so you only have one monthly payment to worry about. But that’s where the similarities end. Both options have their pros and cons. So, ultimately, your choice will depend on your situation and personal preferences.

Ask yourself:

  • Do you want to consolidate your credit card debt, or several different types of debt?
  • How much debt do you have? A balance transfer may be better for smaller debts, especially if you qualify for a 0% interest offer. But if you have larger debts, a personal loan could work out cheaper over time.
  • How much can you afford to repay? And can you commit to a long-term payment plan? Personal loans are more structured, while balance transfers offer more flexibility.
  • How much would you have to pay in fees?

To find out how much a balance transfer or personal loan would cost you, check your offers inside your ClearScore account.

Next step: Find balance transfer credit cards or compare personal loans with ClearScore.

Andre Spiteri Image

Written by Andre Spiteri

Financial Writer

Andre is a former lawyer turned award-winning finance writer.