Personal Loan vs. Credit Card: Which Is Best for You?
Two of the most common types of debt are personal loans and credit cards. Many people think you can use them interchangeably to cover the same purchases, but that’s not always a good idea. When comparing a personal loan vs. credit card, you’ll see stark differences separating the two. As a consumer, it’s important to know how they stack up and when it makes the most sense to use one over the other.
Personal loans vs. credit cards: An overview
Personal loans and credit cards are fundamentally different financial instruments. A personal loan gives you a one-time deposit of a set amount of money. A credit card, on the other hand, acts as a revolving line of credit you can use up to your balance limit.
Here’s a quick primer on the key differences between personal loans vs. credit cards:
Lump sum payment
Line of credit
Usually lower than credit card
Usually higher than personal loan
Firm end date, usually a few years
Based on original loan amount
Based on balance
Equal monthly installments for the length of the loan term
Payments can go up or down depending on balance and interest
Beyond the core distinction of a loan vs. a line of credit, one of the biggest differences you’ll find between these two options is the interest rate. Personal loans frequently offer lower interest rates than credit cards.
Also, keep in mind interest rates on personal loans are fixed starting from day one. You don’t need to worry about your rate suddenly spiking after an introductory period, as is common with credit card promotions.
Personal loans: Pros vs. cons
Personal loans can be a great financial tool, but there are pros and cons to weigh:
- Often have a lower interest rate compared with a credit card
- Set monthly payments make it easier to budget
- Quick loan application and approval process
- Fast time to fund
- Often only requires a soft pull on your credit, which is unlikely to affect your credit score
- No option to receive more funds without taking out another loan
- Opening a personal loan usually requires a hard pull on your credit report which will impact your credit score
- May face fees for late or missed payments
Credit cards: Pros vs. cons
Credit cards have plenty of advantages too, but there are some significant drawbacks that any cardholder should know about before they dig themselves too deep into debt.
- Open-ended line of credit
- Credit card companies may offer additional perks like points or money back
- Convenient to use and accepted in many situations
- High interest rates
- May pay more interest compared with a personal loan
- Most issuers charge annual fees plus penalties for late or missed payments
- Amount owed each month will likely change
- Often requires a hard pull on your credit, which may affect your credit score
When are loans a good option to use?
Personal loans are ideal for making larger purchases that would otherwise be difficult to finance — that is without depleting your account balances. Some of the most common uses for a personal loan include:
- Consolidating debt
- Making major home renovations
- Financing a large purchase or expense
Because personal loan interest rates often undercut credit cards by such a large margin, consolidating high-interest debt could significantly reduce the amount of interest you owe.
Paying back a personal loan can be much simpler as well. Your loan amount will be split into monthly payments that are spread out across your loan term — anywhere from 12-60 months. That means you could be free and clear of your credit card debt in as little as one year.
Making major home renovations
Home improvement projects like house additions, kitchen updates and bathroom upgrades can be expensive, and even if you have the funds to cover those costs, you may feel uneasy about dipping into your savings account or draining your vacation fund to do so. That’s where a personal loan can help finance renovations, letting you pay your contractors for their work and then repay that debt in predictable monthly payments.
Financing a large purchase or expense
There are only a few limits on how you choose to use a personal loan, so you can use that money to pay for most anything that comes your way. That could include expensive medical bills, a once-in-a-lifetime vacation or a showstopper of a wedding. Again, because personal loans typically offer lower interest rates, you might pay less in the long run by financing these purchases with a loan rather than a credit card.
When should you use a credit card?
Most people carry a credit card to make day-to-day purchases, and that’s really the best way to use them. Smaller expenses that you could pay for in cash, but prefer the convenience of swiping a card, are ideal for credit cards.
You should avoid using a credit card for large purchases like home improvement projects. Adding a massive expense to your balance can put yourself in an untenable financial position due to high interest rates.
Is a personal loan better than credit card debt?
Personal loans have several advantages that make them better suited for many situations. The combination of a comparatively low interest rate and predictable repayment schedule means you could owe less interest and have an easier time paying back your loan. Keep your credit card in your wallet unless you’re making smaller purchases like buying groceries or picking up a tab.
Reach out to one of our personal loan specialists to learn more.
* You must be 18 years of age or older. To qualify, a borrower must be a US citizen, a permanent resident, or a non-permanent resident in the US on a valid, long-term visa. All loan applications are subject to credit review and approval as well as income and employment verification. You must meet our minimum requirements established for this offer including, but not limited to, credit history, debt-to-income ratio, and application information. Your actual rate depends on your requested loan amount, loan term, creditworthiness, and a variety of other factors. Loan amounts range from $4,000 - $50,000. Rates and loan amount may differ due to state specific requirements and may impact your ability to qualify for a loan. Limitations: CA (rate and amount), FL, ME, NC, TX and VT (rate), IL, MA, RI (amount). The lowest rate advertised is reserved for the most creditworthy borrowers. Advertised rates and terms are current as of 8/10/2022 and are subject to change without notice.
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