Balance Transfer vs. Consolidation Loan

If you’re navigating multiple debts, you may be choosing between consolidating your debt with a loan or using a balance transfer card. No matter which way you go, it’s great that you’re taking steps to simplify repayment and try to get out of debt sooner.

Balance transfer credit cards and debt consolidation loans both combine your debts and could potentially save on interest. But your ideal debt relief solution depends on your credit profile, the type of debts you have, and your repayment preferences. 

Let’s see whether one of these popular debt relief methods could be right for you.

What is a Balance Transfer? 

A credit card balance transfer is when you move debt from an existing credit card or loan to a new credit card, usually with a lower interest rate. ​Some balance transfer credit cards offer an intro 0% APR for a limited time (typically six to 21 months). 

This means that you aren’t charged interest on your transferred balance during the promotional period. ​You do pay a balance transfer fee—typically 3% to 5% of the transferred balance—but this could be more affordable than continuing to pay high interest fees.

Transferring your debt doesn’t reduce what you owe, but when used strategically, a balance transfer credit card could save you money on interest and make your debt more manageable.

​Generally, you need good to excellent credit to qualify for a balance transfer credit card. It can be difficult to get approved if you have credit card accounts that are already behind. Note that balance transfers come with a danger—if you haven’t paid off the transferred balance when the promotional period runs out, the interest you're charged on the remaining balance could skyrocket. It could also be tempting to use the card again when you’ve transferred the balance and brought it back to zero. And both these things could make it more difficult to get out of debt. 

What Is a Debt Consolidation Loan? 

A debt consolidation loan is a new loan used to pay off multiple existing debts. With one monthly loan payment, debt repayment may be more manageable.

It’s common to use personal loans to pay off credit card debt. Most personal loans are unsecured, meaning you don't need collateral or something of value to back up the loan. Personal loans still typically have lower interest rates than credit cards.

Home equity loans are another debt consolidation option for homeowners who have enough home equity, which is the value of your home over what you owe. However, these loans are secured and require using your home as collateral. That means you risk losing your home if you fall behind on payments. ​

Debt consolidation loans typically have fixed interest rates and set repayment terms. Personal loan terms are typically two to five years, and home equity loan terms are typically 10 to 30 years. 

As with balance transfer cards, you'll need to avoid new credit card spending once you consolidate. This could be tempting since your card balances are back to zero.

Balance Transfer vs. Consolidation Loan: Key Differences

Let’s take a closer look at the differences between these two debt consolidation tools: 

As a reminder, neither option reduces the total amount of debt owed. And neither will be as effective if you can't get a lower interest rate than you're paying now.

Pros and Cons of Balance Transfers

Let’s review some potential benefits and drawbacks of balance transfers. 

Potential benefits 

• Limited-time promotional APR could reduce total interest costs. 

• Simplifies debt repayment by combining multiple card balances into one.

Potential drawbacks

• Balance transfer fees apply, which could reduce savings. 

• High APR applies to any remaining balance after the promotional period ends.

• The transfer card credit limit may not cover all the balances you want to transfer.

• There’s potential to rack up more debt than you started with if you keep spending with your cards.

• Doesn’t usually work well if you’re already behind on payments. 

• There is a risk of ending up in a pattern of juggling balance transfers. 

Pros and Cons of Consolidation Loans 

Let’s take a look at some potential benefits and drawbacks of consolidation loans. 

Potential benefits 

• Fixed interest rates and predictable monthly payments make budgeting easier. 

• A firm payoff date gives a clear timeline for paying off your consolidated debt. 

• Paying off credit card debt with an installment loan could have a positive impact on credit utilization, which could improve your credit score. 

Freedom Debt Relief is not a credit repair organization and doesn't provide or offer services or advice to repair, modify, or improve your credit.

Potential drawbacks 

• Your loan may include origination fees (typically 1% to 8% of the loan amount). 

• You may not qualify for a loan with a lower interest rate if your credit score has declined.

• Freeing up credit card balances may make it tempting to accumulate new debt. 

• Your monthly payments could be higher than the minimum payments for your credit cards.

How to Choose Between a Balance Transfer and Consolidation Loan 

A balance transfer may be ideal if…

• You have a strong credit profile. 

• Your credit card balances are manageable. 

• You can afford to pay off the transferred balance before the promotional APR ends.

Note: If you opt for a balance transfer, choose a payment amount that’s big enough to pay off your debt before your goal date. A balance transfer should be a one-time strategy, so you don’t fall into a pattern of juggling balance transfers. 

A consolidation loan may be ideal if…

• You need a bigger loan.

• You need more time to repay your debt. 

• You don’t qualify for a balance transfer. 

• You need predictable payments.

• You could benefit from a fixed payoff timeline.

Before deciding which path is right for you, compare the total cost of each. Calculate all fees and post-promo rates to make sure you know what to expect. 

What If You Don't Qualify for Either Option?

Balance transfers and consolidation loans are typically available only to applicants with fair to excellent credit, and not everyone qualifies for favorable terms. If you don’t qualify, other debt relief strategies may help. 

Debt settlement could be an option for those who can’t afford to repay their debts in full due to financial hardship. Debt settlement means you negotiate with your creditors to get rid of your debt for less than you owe. Some creditors will forgive a portion of your debt in exchange for partial payment.

You can settle your debts on your own, or work with a professional debt settlement company.

Find the Right Path to Handle Your Debt

When used strategically, balance transfers and consolidation loans could help by streamlining debt repayment and potentially reducing interest. As you consider next steps for managing your debt, choose the path that most aligns with your needs and goals.

It can be helpful to calculate your total debt, credit standing, and ability to make payments before you decide on your next steps. If you’re unsure which approach is right for your situation, connect with a debt expert to learn more about your options through a free debt evaluation.