Learn the Difference Between Personal Loans and Credit Cards: Which is Right for You?

Here are a few tried and proven techniques for borrowing money when you need to consolidate debt or cover an obligation. Many consumers must choose between a personal loan and a credit card. So how can you determine which one is best for you?

Both credit cards and personal loans can provide you with a quick cash infusion, but each has advantages, disadvantages, and considerations. Here’s what you should know before you borrow.

First, what exactly is a personal loan?

Most people are familiar with credit cards, but personal loans may be unfamiliar. A personal loan allows you to borrow money for various purposes, including debt consolidation, emergency needs, and home improvements. You can receive a personal loan through a bank, credit union, or online lender. The terms and conditions vary depending on the source of the loan and your financial situation.

A personal loan works in the same manner as auto, home, and student loans do. You apply for the required amount, and the lender examines your credit report and history to evaluate whether you qualify and at what interest rate. Generally, the better your credit, the lower your interest rate, and the more you’ll save on overall interest. You then repay the loan monthly until the debt is paid off.

Personal loans come in several varieties. Some lenders, for example, don’t demand a credit check. These loans are typically modest and have incredibly high-interest rates.

There are also auto title loans, which are short-term loans that use your vehicle’s title as security. These loans also have very high-interest rates. However, one of the most frequent types of personal loans is an unsecured loan or one that is not secured by collateral—and a credit check is usually necessary.

Personal loan vs. credit card

While each scenario is unique, here is a general rule of thumb to follow when deciding between the two options:

Personal loans are usually preferable for more extraordinary expenses that take longer to pay off. Credit cards are usually ideal for modest expenses that can be paid off promptly. Because credit cards often have higher interest rates than personal loans, holding a balance on a card for an extended period can be costly. However, there are always exceptions and a few crucial things to consider.

Personal loan advantages and disadvantages

• Spend less.

Except for 0% introductory APR cards1, personal loans have lower interest rates than credit cards. Your credit profile will determine your interest rate.

• Remove any temptation.

Personal loans, unlike credit cards, do not allow you to borrow more money continually. You’ll be debt-free as soon as you make your payments on schedule.

• Improve your credit.

Credit cards and personal loans can both help you improve your credit if you make your payments on time, every time. Using a personal loan to pay off credit card debt has the added benefit of lowering your credit utilization ratio (the percentage of available credit you’ve utilized), which can improve your credit score. Remember that this only works if you keep the credit card open and resist the impulse to use it again.

• Fixed rate.

Personal loans typically have a fixed interest rate, which implies that your payment will be consistent over time. (Please keep in mind that late payments or other fees might increase the cost of a fixed-rate loan.)

• Higher pay.

Because a personal loan has a fixed period (for example, 36 months), it often has more outstanding minimum payments than a credit card. Individuals with less disposable income may find it more challenging to manage the increased monthly installments of a personal loan.

• Fees and penalties

Some personal loans have origination or upfront costs and prepayment penalties (assessed for paying more than the minimum). Inquire with the lender about these and other possible fees.

Credit card benefits and drawbacks

• Simple accessibility.

If you already have a credit card with available funds, you can borrow it right now. In terms of new credit cards, the application process is less demanding than personal loans—though this is changing, with some modern lenders now offering simple online and even mobile applications.

• Promotional offers.

Many firms offer 0% introductory rates on new cards or balance transfers, so if you can pay off the balance in that duration (usually 6-12 months), you can avoid paying interest entirely.

• Repair credit.

If your credit is in bad shape, a secured credit card (one that needs a cash deposit as collateral) may be easier to obtain than an unsecured card or personal loan. Make on-time payments to improve your credit score for the real thing.

• Rate changes.

Many credit cards feature variable interest rates, which means the rate is linked to another interest rate (for example, the prime rate) and might rise over time, taking your payments and total interest cost. Even fixed-rate credit cards may raise their charges if you make late payments (terms vary by the issuer).

• Fees in cash.

A credit card cash advance typically comes with a fee if you require actual cash.

• Constant temptation

Unless you cut up the card, you may be tempted to continue stacking up a balance, making it difficult to break the debt cycle.

How to Decide Between a Personal Loan and a Credit Card

Still not sure which one is best for you? Here are a few questions to consider:

1. How much money do you need to borrow?

A lesser payment is frequently easier to pay off, making a credit card an appealing option (especially if you already have one with funds available).

2. How long will it take you to pay off the debt?

A personal loan could save you money if the period is longer than a few months. You can use a loan payback calculator to compare the costs of each option.

3. How excellent is your credit?

With excellent credit, you may get a better rate on a personal loan, but you may also be eligible for a 0% introductory APR on a new credit card. Again, a loan calculator can assist you in determining which path will save you the most money.

4. Do you require cash?

Keep in mind that credit card cash advances frequently come with additional costs.

5. Do you tend to overspend?

A credit card can trap you in a debt cycle if you have problems resisting temptation. As you can see, there is no one-size-fits-all solution to the personal loan vs. credit card debt argument.

Taking the time to learn about your options can help you save money and achieve your financial objectives in the long run.