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Three ways to consolidate and pay off debt are a balance transfer credit card, a personal loan, or a combination of the two. Which option is best depends on the type and amount of debt you have and your ability to pay off that debt over time.

For instance, a balance transfer credit card might be a smart choice if you have good credit and debt across a few credit cards. On the other hand, a personal loan might be better if you have multiple types of debts (credit cards plus other types of loans) and need more time to pay off your debt.

Read on to learn more about the choice between a balance transfer or personal loan, including the pros and cons of each option and how to leverage the benefits of both.

What Is a Personal Loan?

A personal loan is a lump sum borrowed from traditional banks, credit unions, or online lenders that you agree to pay back over time, usually with interest. The borrower will make regular payments, usually on a monthly basis, to the lender over a fixed period of time until the loan is repaid.

Unlike many other types of loans, personal loans can be used for just about anything. Often, these loans are used to resolve short-term cash flow problems, cover unexpected expenses during an emergency, or pay for large expenses.

Personal loans are also used for debt consolidation, where a borrower takes out a personal loan and uses it to pay off balances on high-interest credit cards and other debts. Because personal loans typically have lower interest rates than credit cards, the borrower can potentially save money while paying off their debt.

Though there are different types of personal loans, they’re most often unsecured loans. This means they’re not backed by collateral like, say, your mortgage is backed by your house. As such, the lender will usually assess your creditworthiness and financial situation when determining whether to approve you for the loan.

Recommended: Check Your Personal Loan Rate

What Is a Balance Transfer Credit Card?

A balance transfer credit card is a credit card that allows you to transfer balances from other accounts. Let’s say an individual has outstanding balances on three or four high-interest credit cards. They could transfer that debt to a balance transfer credit card that charges a lower or even 0% annual percentage rate (APR).

If a lower rate is offered, it will usually last for a limited period of time — 12 to 18 months is the norm. Should that person pay off their debt within that window, they could save money on interest and have all of their payments go directly toward paying down the principal. After the promotional period ends, however, the interest rate could be quite high, usually higher than the interest rate on a personal loan.

Balance Transfer vs Personal Loan for Debt Consolidation

When deciding on either a balance transfer credit card or personal loan for debt consolidation, consider the type of debt you have and your capacity for monthly payments.

A balance transfer credit card might be the right choice if you’re confident you can pay off your debt within the APR introductory period. However, a personal loan might be the better choice if you find it difficult to resist spending on a credit card, or if you have debt that needs to be paid off over a longer period of time. Personal loans are also preferable if you want a fixed interest rate and would like to know ahead of time how much your monthly payment will be, as it’s going to be the same each month.

Pros and Cons of Personal Loans

Both balance transfer credit cards and personal loans can be good options depending on the amount and type of debt you have. Personal loans generally offer lower APRs, which can be helpful if you have a variety of types of debt that may take some time to pay off. Personal loan terms vary, but it’s possible to borrow up to $100,000 and pay off the balance over several years.

However, your interest rate will also depend on your credit score — a low score can mean a high interest rate. It’s smart to compare a few rates, such as SoFi personal loan rates against those of other lenders.

Pros and Cons of Balance Transfer Credit Cards

If you only have debt on a few credit cards, a balance transfer credit card might allow you to save on interest while you pay it down. These cards can offer lower or even 0% APRs for a certain period of time, usually for 12 to 18 months. This gives you time to pay off the total balance transferred from other cards.

However, suppose you do not pay off the balance within that window. In that case, the interest rate could rise above the rate you were initially paying before you consolidated the amounts to your balance transfer credit card.

Using A Balance Transfer Credit Card and a Personal Loan

A third option for debt consolidation is to use both a personal loan and a balance transfer credit card. You could use a balance transfer credit card to pay off as much high-interest credit card debt as you can at a low APR. Then, you’d take out a personal loan to pay off the rest of your debt at a lower interest rate than what you’re currently paying.

To figure out how much of a personal loan to take out in this scenario, add up your total debt. Next, calculate how much you would have to pay each month in order to pay off your debt in full by the end of the promotional APR.

For example, if you had $4,000 in credit card debt and a 0% APR that lasted for 18 months, you’d have to pay $222 each month. If you weren’t able to pay that much, you could consider applying for a personal loan to pay off the remaining amount.

The Takeaway

Three ways to proactively consolidate and pay off debt are to use a balance transfer credit card, a personal loan, or a combination of the two. To determine what’s right for your situation, it helps to know the differences between a balance transfer credit card vs. personal loan. In general, a balance transfer credit card is best for those with good credit and primarily credit card debt. Those with various types of debts and who need a structured debt payment plan may prefer a personal loan.

Deciding which option to choose requires some research upfront on how much debt you have, what type of debt it is, and how long you will need to pay it off. Those looking to consolidate their debt should also check the terms and fees of their options.

One option to explore might be SoFi, which offers personal loans for debt consolidation. The online application is convenient and fast. Plus, our personal loans have zero origination, prepayment, or late payment fees. They offer low fixed rates, and amounts range from $5,000 up to $100,000.

FAQ

What is a balance transfer loan?

A balance transfer is a credit card transaction whereby debt is moved from one account to another. These cards often offer a 0% introductory APR for 12 to 18 months, which means any balances moved to the card could potentially be paid off interest-free. The downsides are that there is often a balance transfer fee, and there may be a limit to the total amount you can transfer to the new card.

Does a balance transfer hurt your credit?

It depends. Opening a new credit card and transferring all your other credit card balances to it could push your credit utilization ratio to its limit, which would hurt your credit score. Your score is also negatively affected from the hard inquiry that results from applying for a new card. However, if you use a balance transfer credit card wisely and pay off all of your higher-interest cards, that will lower your credit utilization ratio and lift your score.

Is there a difference between a loan and a balance transfer?

Both a loan and a balance transfer are ways to consolidate debt, but they are not the same thing. A debt consolidation loan is where you take out a loan to pay off your existing debt, while a balance transfer allows you to move your existing debt onto one credit card. Each option has unique pros and cons.

Photo credit: iStock/PeopleImages

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

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Imagine you’re a lender, and a wellness entrepreneur comes to you to borrow thousands or hundreds of thousands of dollars. The loan seeker is the picture of health, drives a Tesla S, and lives in a solar-powered manse. But what if the would-be borrower is overextended, and not in a yoga-like way?

You’re going to want to compare their current income to their debts to help gauge how likely you are to be paid back.

Makes sense, right? A debt-to-income ratio helps to determine whether someone qualifies for a loan, credit card, or line of credit and at what interest rate.

A low DTI ratio demonstrates that there is probably sufficient income to pay debts and take on more. But what’s “low” or “good” in most lenders’ eyes?

First, a Debt to Income Ratio Refresher

In case you don’t know how to calculate the percentage or have forgotten, here’s how it works:

DTI = monthly debts / gross monthly income

Let’s say monthly debt payments are as follows:

•   Auto loan: $400

•   Student loans: $300

•   Credit cards: $300

•   Mortgage payment: $1,300

That’s $2,300 in monthly obligations. Now let’s say gross monthly income is $7,000.

$2,300 / $7,000 = 0.328

Multiply the result by 100 for a DTI ratio of nearly 33%, meaning 33% of this person’s gross monthly income goes toward debt repayment.

What Is Considered a Good DTI?

The federal Consumer Financial Protection Bureau advises homeowners to consider maintaining a DTI ratio of 36% or less and for renters to consider keeping a DTI ratio of 15% to 20% or less (rent is not included in this ratio).

In general, mortgage lenders like to see a DTI ratio of no more than 36%, though that is not necessarily the maximum.

For instance, DTI limits can change based on whether or not you are considering a qualified or nonqualified mortgage. A qualified mortgage is a home loan with more stable features and without risky features like interest-only payments. Qualified mortgages limit how high your DTI ratio can be.

A nonqualified mortgage loan is not inherently high-risk or subprime. It is simply a loan that doesn’t fit into the complex rules associated with a qualified mortgage.

Nonqualified mortgages can be helpful for borrowers in unusual circumstances, such as having been self-employed for less than two years. A lender may make an exception if you have a high DTI ratio as long as, for example, you have a lot of cash reserves.

In general, borrowers looking for a qualified mortgage can expect lenders to require a DTI of 43% or less.

Under certain criteria, a maximum allowable DTI ratio can be as high as 50%. Fannie Mae’s maximum DTI ratio is 36% for manually underwritten loans, but the affordable-lending promoter will allow a 45% DTI ratio if a borrower meets credit score and reserve requirements, and up to 50% for loans issued through automated underwriting.

In the market for a personal loan? Some lenders may allow a high DTI ratio because a common use of personal loans is credit card debt consolidation. But most lenders will want to be sure that you are gainfully employed and have sufficient income to repay the loan.

Front End vs Back End

Some mortgage lenders like to break a number into front-end and back-end DTI (28/36, for instance). The top number represents the front-end ratio, and the bottom number is the back-end ratio.

A front-end ratio, also known as the housing ratio, takes into account housing costs or potential housing costs.

A back-end ratio is more comprehensive. It includes all current recurring debt payments and housing expenses.

Lenders typically look for a front-end ratio of 28% tops, and a back-end ratio no higher than 36%, though they may accept higher ratios if a credit score, savings, and down payment are robust.

How Can I Lower My Debt-to-Income Ratio?

So what do you do if the number you’ve calculated isn’t your ideal? There are two ways to lower your DTI ratio: Increase your income or decrease your debt.

Working overtime, starting a side hustle, getting a new job, or asking for a raise are all good options to boost income.

Strangely enough, if you choose to tackle your debt by only increasing your payments each month, it can have a negative effect on your DTI ratio. Instead, it can be a good idea to consider ways to reduce your outstanding debt altogether.

The best-known debt management plans are likely the snowball and avalanche methods, but there’s also the fireball method, which combines both strategies.

Instead of canceling a credit card, it might be better to cut it up or hide it. In the world of credit, established credit in good standing is looked upon more favorably than new.

The Takeaway

Your debt-to-income ratio matters because it affects your ability to borrow money and the interest rate for doing so. In general, lenders look at a lower DTI ratio as favorable, but sometimes there’s wiggle room.

If you’re struggling with student loan debt, refinancing might be a good option if you can lower your interest rate. And if you’re trying to pay off high-interest credit card debt, one method is to consolidate the debt with a fixed-rate personal loan. This can lower your monthly payment, thus changing your DTI ratio.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.

A person’s net worth describes their total financial value, and is calculated by subtracting their liabilities from their assets. Though we generally discuss net worth in relation to very wealthy individuals, it can be important for people who aren’t billionaires to know their net worth as well.

A person’s net worth can be an important reference point in understanding one’s financial position. Net worth can be negative, especially early on in one’s careers. But net worth can help an individual figure out how much they need to save, how much spending they need to cut back on, or how much they’ve saved for retirement.

How to Calculate Net Worth

If you’re wondering how to calculate net worth, it’s actually a simple formula:

Assets – Liabilities = Net Worth

The hard part is usually determining a person’s assets and liabilities. And a person’s assets can go beyond what they have in their checking account. In fact, a person’s assets can include a whole host of things.

Assets

Assets basically boil down to how much money you have, as well as the value of things you own. In order to know one’s net worth, estimate the value of each asset below:

•   Money in savings accounts

•   Money in checking accounts

•   Money in investing or retirement accounts. Brokerage accounts or 401(k)s are in this bucket.

•   Physical cash

•   Value from insurance policies

•   Value from business ownership or stakes

•   Value of cars

•   Valuable personal goods, like jewelry or art

•   Value of real estate, including home

Calculating the value of a home can be a task in itself. It’s important to research the value of the homes around you, the size of your home, any deferred maintenance on the home, additional benefits like parking spots, backyard space, room count, etc. There are a number of home value calculators online, too.

Recommended: Understanding Property Valuations

There are other ways to think about assets:

•   Liquid Assets: Items like stocks, bonds, mutual funds, or ETFs that are easy to sell quickly and whose sale will not greatly affect their price.

•   Fixed Assets: These are items that would take a longer time to convert to cash. These assets are often deposited for extended periods of time in exchange for high interest accrual and thus cannot be cashed before their agreed-upon time frame is up.

•   Equity Assets: Equity assets include your shares in a company, either private or public.

Intangible Assets, such as brand recognition for a company or any other intellectual property like patents, trademarks or even goodwill, are trickier to factor into your net worth due to the complexity of measuring their value.

Liabilities

Liabilities are debts. The following categories are what most often make up liabilities:

•   Auto loans

•   Student loans

•   Personal loans

•   Business loans (personally guaranteed)

•   Credit card balances

•   Mortgages

While liabilities are on the negative side of the net worth equation, it doesn’t necessarily have to symbolize something negative about your finances. For example, student loans or mortgage loans are typically seen as necessary loans that individuals take on as they reach milestones in life, like going to college, graduate school or buying a home.

Meanwhile, knowing one’s total liabilities can help with figuring out a plan to start paying off debt that has higher interest rates, like from credit card balances.


💡 Quick Tip: All investments come with some degree of risk — and some are riskier than others. Before investing online, decide on your investment goals and how much risk you want to take.

Median and Average Net Worth in US

An individual or household’s net worth isn’t set in stone, and it ebbs and flows all the time. For that reason, it can be difficult to nail down median or average net worth figures for both individuals and households in the U.S. You can find some numbers if you search for them, but they’re often several years old, and may not be accurate given the time lapse.

For instance, the Federal Reserve tracks median and average net worth data in the U.S., but generally, they do so using survey data that it publishes once every few years. So, while data from a few years ago may be fine, large-scale world events–such as a pandemic, natural disaster, recession, or similar–may have led to large changes in those numbers.

This is all something to keep in mind if you seek out average net worth numbers. It’s not that they’re inaccurate, it’s simply that the data may be hard to capture and synthesize in a reasonable amount of time.

Remember, too, that it’s important to keep abreast of your net worth because this number may fluctuate depending on factors such as stock values, interest rates, real estate trends, and other tides of the financial world. It’s important to have an idea of overall trends so you can generally understand your financial health and have an idea of your true wealth.


💡 Quick Tip: Distributing your money across a range of assets — also known as diversification — can be beneficial for long-term investors. When you put your eggs in many baskets, it may be beneficial if a single asset class goes down.

The Takeaway

True wealth can be an important factor in knowing when you might expect to retire. It’s a good idea to focus on your gains year over year, rather than the number you get at the end of the equation. If you’re concerned about your net worth or are hoping to increase it, especially for future retirement goals, then it might be helpful to consider investing.

There are a multitude of things that can have an effect on your net worth. And focusing strictly on your net worth probably shouldn’t be your focus. If you’re concerned about it, though, it may be worthwhile to talk to a financial professional.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

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