Personal Loans vs. Zero Interest Balance Transfer Credit Cards

The main difference between a personal loan and a new “0% interest balance transfer” credit card is the way in which you are able to utilize these funds as a consumer. A personal loan has the most flexibility in terms of what you can use the line of credit for—since the loan is being directly deposited into your bank account—you can literally use the funding for whatever you want. A new credit card on the hand does have its limitations on how you can use the credit. For example, you would not be able to use the credit card for a purchase that is not merchant related, (i.e. you cannot use a credit card to pay someone in cash, unless you are utilizing a cash advance option on the credit card, and doing so will typically leave you with a very high associated interest rate on the cash advance). On the other hand, a credit card is a revolving line of credit. Meaning that once you do pay the balance that available line of credit does not become depleted, so it has a lot of reusability! Personal loans on the other hand are a one-shot deal, you have a set amortization and repayment and receive the funding once.

How Do the Two Options Compare?

How the two options compare really depends on your personal needs and uses for the line of credit. A personal loan may be better suited for an individual that needs the flexibility in how they will be using the credit. On the other hand, if you have a set category or area of purchase you will be using the credit for, credit cards may be able to offer rewards points on what applicable areas you end up spending on.

What Options is Best for Consolidating?

If you are a consumer that is looking to consolidate debt in order to satisfy other debt obligations, the best option for you will typically depend on your “discipline” and the time you need in order to repay the debt back. If you qualify for a 0% interest rate credit card and suspect you will easily be able to repay the balance by the end of the promotion (typically 12-18 months), this is definitely the best option for you! Keep in mind if you are using a 0% interest balance transfer option, most balance transfers charge an upfront 4% transfer fee (essentially turning the 0% option into a 4% interest option). This method will have you pay the least interest, however it will definitely require discipline on your end, as you will need to fully repay your debt obligation within the promotional period.

A personal loan on the other hand is better suited to an individual that needs more time to repay the debt. A personal loan will cost more in fees and interest than making use of a no interest balance transfer option (there are also associated origination fees and could be other smaller fees including at the time of approval) but this also means that you have a set payment each month and set amortization period. Having a set amount each month and payback period can be very comforting for many consumers.

Depending on the credit card option you qualify for, personal loans will typically cost more in interest than a 0% interest balance transfer option (but less interest than a standard APR credit card).

Which Option is Best for Those Carrying Debt?

The better option for people carrying debt will typically be the balance transfer option, although it’s a solution with a time constraint. If you are highly disciplined and truly believe that you can finish repayment within the promotional period you should definitely opt for the balance transfer route. Although both options are essentially “robbing Peter to pay Paul”, utilizing a balance transfer will save you the most in interest if you succeed in abiding by all associated terms and make sure to read the fine print.