Personal Loan vs. Credit Card: Which One Should I Choose?

If you need a cash infusion for whatever reason, a credit card or personal loan could be the answer you’re looking for. With either option, you can get access to the money you need fairly quickly. You should, however, plan to pay the money you borrow back plus interest.

Unfortunately, choosing between a credit card and a personal loan isn’t always easy. Where a credit card is usually better for short-term debt, a personal loan is often ideal for people who need more time to repay. Then again, which option is best for you may boil down to how much interest you’ll pay, too. Regardless of whether you open a credit card or take out a personal loan, you’ll want to find the lowest cost option for your needs.

This page includes details on how credit cards and personal loans work, along with tips on choosing the best option for your situation. Keep reading to learn more.

Credit Cards and How They Work

Credit cards provide a convenient form of payment for whatever you buy, whether it’s in person at a store or online. The downside is, using a credit card for regular purchases and neglecting to pay your balance in full can result in huge interest charges that accumulate over time.

You see, credit cards don’t require you to pay your balance all at once. Instead, you’re given the too-enticing option of making a minimum payment each month while letting credit card interest accumulate on your remaining balance. The interest charged by your credit card issuer depends on your card’s APR, or annual percentage rate. If your APR is high, your interest charges will add up in a hurry.

This is also why credit cards are considered “revolving debt.” While you might start off with a traditional credit limit, the amount you can borrow varies depending on how much you spend and how much you pay off each month.

Credit cards can be secured or unsecured, although almost most fall into the latter category. With an unsecured credit card, you’re offered a line of credit that isn’t tied to any collateral. With a secured credit card, on the other hand, you’re required to put down a cash deposit as collateral to secure your line of credit.

Credit Card Benefits:

  • You can apply for a credit card at any time, then only use it when you need it.
  • Credit cards are fairly easy to qualify for if you have average or good credit.
  • You can apply for a credit card online without visiting a bank.
  • Some balance transfer credit cards offer 0% interest for anywhere from 12 to 21 months, making it easy to consolidate debt.

Credit Card Drawbacks:

  • Depending on your card’s APR, interest charges can accrue quickly and bury you in debt.
  • Some credit cards charge annual fees, over-the-limit fees, and late fees.
  • You need excellent credit to qualify for credit cards with the lowest interest rates or best rewards programs.
  • While you can pay for many services with a credit card, if you need cash, you may owe a cash advance fee or convenience check fee, and interest may start accruing immediately.

When to Use a Credit Card:

  • When you’re sure you can pay your balance off quickly and minimize interest payments.
  • If you want the flexibility of paying just a minimum payment, but might want to pay more each month.
  • If you can’t qualify for a personal loan.
  • When you don’t want to put down collateral.

When a Personal Loan Works Better

In some cases, a personal loan might work better than a credit card. Since personal loans tend to offer lower interest rates than credit cards, this is especially true if you have good or excellent credit.

The big difference with a personal loan is that you’re given a lump sum upfront instead of a credit card to use for purchases. With a personal loan, you’ll also have regular monthly payments to make over the length of your loan, which is usually somewhere between two and 10 years.

Personal loans can be unsecured or secured. With an unsecured loan, you aren’t required to put down collateral, while a secured personal loan requires collateral of some type. One type of secured personal loan, a home equity line of credit (HELOC), lets you borrow money against the equity in your home and uses your home as collateral. With this loan product, the interest you pay is likely tax deductible.

Personal Loan Benefits:

  • Personal loans usually come with lower interest rates.
  • Personal loans are great for consolidating debt if you can get a lower interest rate.
  • You can apply for a personal loan online or at a traditional bank or credit union.
  • Personal loans come secured or unsecured.

Personal Loan Drawbacks:

  • You’ll have a set payment schedule to adhere to.
  • You’ll usually need good or excellent credit to qualify.
  • You may have trouble qualifying if you don’t have a lengthy credit history.

When to Use a Personal Loan:

  • When you need two to 10 years to repay the money you borrow.
  • When your credit is good enough to qualify for a low interest rate.
  • When you need to consolidate high-interest debt and can’t qualify for a 0% APR credit card.

Personal Loan vs. Credit Card: The Bottom Line

In a lot of ways, credit cards and personal loans are one and the same: Both let you borrow money and repay it over time, and both options charge interest for the privilege.

On the other hand, one option might be a clear winner over the other depending on your credit and other circumstances. Make sure to read the fine print and compare all of the financial products at your disposal before you decide.

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