Personal Loan vs. Credit Card: Which Should You Choose?
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Credit cards and personal loans are both ways to borrow money, but key differences can make one option better than the other in certain financial situations. The main difference is that credit cards offer a continuous line of credit (called a revolving line of credit), while personal loans provide a specified amount of money. Understanding when to use each type of loan can help you better manage your finances and even save you money in the future.
Read on to learn more about personal loans vs. credit cards, including the pros and cons of each.
Key takeaways:
- A personal loan is a lump sum of money you borrow with a set repayment schedule.
- A credit card is a revolving line of credit that allows you to borrow funds up to your credit limit as needed.
- Personal loans are typically used for large, one-time purchases, while credit cards are used for smaller, everyday purchases.
Personal Loan vs. Credit Card: Overview
Like we said above, a personal loan is a type of installment loan where you borrow a lump sum of money and repay it over a set period. Credit cards are a type of revolving credit and offer access to a continuous line of credit that you can spend and repay on an ongoing basis.
Below are more key differences between a personal loan and a credit card.
|
|
Personal Loan |
Credit Card |
|---|---|---|
|
Type of credit |
Installment loan |
Revolving credit |
|
Average interest rate |
11.92% |
22.76% |
|
Repayment terms |
Fixed payments over a set period of time |
Minimum payment due monthly |
|
Fees |
Origination fees and late fees |
Late payment fees, foreign transaction fees, over-the-limit fees, and potential annual fees |
|
Access to funds |
Lender provides a lump sum upfront |
Continuous access up to credit limit |
|
Best for |
Large purchases |
Everyday expenses |
When to Take Out a Personal Loan
You may consider taking out a personal loan to cover a large, one-time expense or consolidate other debt. However, before you take out a personal loan, it’s important to make sure you can afford to pay the monthly payments on time.
Here are some common reasons for taking out a personal loan:
- Consolidating debts
- Renovating or repairing your home
- Funding a wedding or other special event
- Covering medical bills
- Paying an unexpected expense
Personal Loan Pros and Cons
The main benefit of a personal loan over a credit card is that personal loans generally offer lower interest rates than credit cards. Plus, the set repayment schedule allows you to easily manage the debt and create a budget to pay it off. If you make payments on time, a personal loan can help raise your credit score.
On the other hand, this option may not work for you if you need long-term financing. With a personal loan, you’ll need to reapply for another loan if you need additional funds. Plus, personal loans don’t offer any rewards or cash back that you’ll likely get with a credit card.
Below are more pros and cons to consider before taking out a personal loan:
|
Pros |
Cons |
|---|---|
|
Quick process |
Fees and penalties |
|
Lower interest rate |
No rewards or bonuses |
|
Fixed repayment timeline |
Must take out another loan if you need more money |
|
Can be used for debt consolidation |
When to Swipe a Credit Card
A credit card is a good option for small, continuous payments that you make over time. Credit cards offer a revolving line of credit, meaning you only have to borrow the amount of money that you need up to your credit limit.
Below are examples of purchases you may want to consider making with your credit card instead of a personal loan:
- Making small, everyday purchases
- Paying for monthly subscriptions
- Funding your gym membership
- Covering utilities and phone bills
Credit Card Pros and Cons
The main advantage of using a credit card is its flexibility. You only have to borrow the exact amount of money you need, and you can access the funds quickly and easily. Another advantage is the ability to earn credit card points, rewards, and other bonuses that can help you save on flights, hotels, and more.
The biggest drawback is high credit card interest rates. As of August 2024, the average interest rate for credit cards carrying a balance is 21.76%, according to the Federal Reserve. In comparison, the average interest rate for a 24-month personal loan is significantly lower at 12.33%.
Additionally, credit cards can easily lead you to get into more debt than you initially intend to. For example, you may plan to only use your credit card for specific expenses and then find yourself using it more often to make purchases.
Below are additional pros and cons to be aware of before using a credit card.
|
Pros |
Cons |
|---|---|
|
Easy access to funds when you need them |
Risk of overspending |
|
Cash back, rewards, and bonuses |
High interest rates |
|
Purchase protection and travel insurance |
Fees and penalties |
|
Flexible borrowing and repayment |
Personal Loan vs. Credit Card for Debt Consolidation
Both personal loans and credit cards can be used for debt consolidation. However, there are some factors to consider when deciding which option is better for you.
With a debt consolidation loan, you use the funds to pay off your debts and then repay the loan in one monthly payment. If you have a large amount of debt you need to combine, a debt consolidation loan can be a great option. Oftentimes, you can get a lower interest rate compared to the average rate of your existing debts.
On the other hand, balance transfer credit cards can also be a good option due to their 0% APR periods. To complete a balance transfer, you’ll need to transfer all of your high-interest existing debts to a balance transfer credit card with a 0% AR period.
Balance transfers are best when you have a smaller amount of debt and can pay it off fully during the introductory period since you may get hit with a high interest rate once it ends. Keep in mind that you may need to pay a balance transfer free, which usually ranges from 3–5%.
Shop for Personal Loans and Credit Cards at Credit.com
When it comes to managing your finances, understanding how different credit options work can help you choose the best loan type for your specific needs.
Typically, people use personal loans for large purchases and credit cards for everyday expenses. However, you don’t have to choose between the two. Get a personal loan for a specific, one-time expense and a credit card for frequent purchases.
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