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Personal Loan Vs. Credit Card

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Eddie McKeen
Personal Loan Vs. Credit Card

What’s Better - Personal Loan or Credit Card?

When you need cash, examining the differences between taking a personal loan vs credit card debt is a worthy place to start. However, is a personal loan better than a credit card? There are several factors that can determine which of the two is ideal for you. These criteria include your credit score, the desired amount of financing, and the time you need to repay your debt.

  • Personal Loans – A personal loan is an installment-type loan. The borrower receives a lump sum from a lender which will be repaid every month over a period that normally lasts between 2 to 5 years. When undergoing a personal loan comparison of online lenders such as Avant and Prosper, choose one that will prequalify your loans. This allows you to see your rates without impacting your credit score.
  • Credit Cards – Instead of receiving a lump sum in cash, a credit card grants access to revolving credit. Credit cards are accompanied by credit limits, allowing you to charge up to the stated amount. Usually, minimum monthly repayments are 2% of the outstanding balance and you can avoid interest by paying the total balance before the due date.

Personal Loans vs Credit Card? These are the Pros and Cons

When deciding between personal loan versus credit card, it’s important to understand the benefits and drawbacks of each. Personal loans grant borrowers access to larger sums and are much better than credit cards for consolidating higher-interest debts.

However, personal loans feature higher interest rates than secured loans. Many personal loans will also come with an origination fee ranging between 1% and 6% of the total loan amount. What’s more, some personal loans will charge a prepayment penalty if you pay the total amount before the loan comes due.

Get a personal loan when:

  • You have multiple debts with high interest rates that you need to consolidate.
  • You have large expenses that require a lot of capital you need to finance.
  • You have a good or excellent credit score and can afford monthly repayments throughout the loan term.

Still wondering whether to choose between a credit card loan vs personal loan? Credit cards allow you to pay the balance over some time. Also, compared to checking accounts, credit cards offer more security. You don’t have to worry about someone clearing out your account if they stole your credit card.

On the other hand, credit cards extend your purchase limit, giving you the feeling that you have more money than you actually do. This can contribute to higher debt over time if left unchecked. Also, depending on how often you pay your credit card balance, interest may amount to hundreds of dollars each year.

Use a credit card when:

  • You have small debts and expenses that require financing.
  • You can pay off your credit card balance in total every month.
  • You qualify for a credit card with a 0% promotional offer.

Our Advice

When deciding between personal loan vs credit card debt, keep in mind that you can use both to get out of debt much faster. For larger debts that require lengthier repayment times, a personal loan likely is the better option. If you have short-term expenses which you can quickly repay in full, then it is advisable to go for a credit card.

Bottom Line

Is a personal loan better than credit card debt? Personal loans and credit cards share some similar attributes given that you can borrow money and repay it over a duration of time. However, there are also major differences between a credit card and personal loan, with the right option for you depending entirely on your personal financial circumstances.

For multiple high-interest debts, personal loans will help you consolidate, potentially at a better rate. Personal loans are also a great choice when seeking to finance large expenses and projects. It is much easier to access personal loans at great terms when you have good to excellent credit scores.

On the other hand, for smaller expenses such as your daily expenses and monthly bills, credit cards are usually the way to go. Just make sure that you can freely pay the balance each month as they can carry a higher interest rates. Also, consider the fact that it is much cheaper to get a card with a 0% promotional offer.