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Personal Loan vs. Credit Card: Which is the Best Choice?

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A personal loan lets you borrow a lump sum of money. You’ll then repay the loan over a set period of time, typically between 12 to 60 months, with a fixed interest rate. A credit card, meanwhile, lets you borrow money on a rolling basis. Your card will come with a credit limit, meaning if you charge purchases up to that limit, you won’t be able to charge purchases to the card until you pay down your balance. Your card will come with a variable interest rate, which can increase and decrease over time.

When weighing a personal loan versus a credit card, there are clear pros and cons to consider. Here’s how to decide which product is right for you.

Comparing personal loans and credit cards

Personal loans and credit cards are two unique financing options, and how to decide which one is right for you will depend on factors such as how much money you need to borrow and how quickly you can pay it back. Choosing the best path for your financial situation will require some light research. Check out this brief overview in the table below:

Personal loans vs. credit cards
Personal loan Credit card
Definition An unsecured loan with usually fixed interest rates and monthly payments An unsecured line of credit with flexible spending and monthly payment terms
APR Varies widely depending on creditworthiness, but can be as low as 5% or higher than 30% Varies widely according to type of card, but APRs for new credit card offers now range from about 15% to 23%
Borrowing limits Typically from $1,000 to $50,000 Usually between $10,000 and $30,000 for high-limit cards, although some creditworthy borrowers might qualify for $50,000 or more
Collateral Secured loans are available and can help build or rehabilitate credit A credit card secured with a security deposit may help build credit
  • Borrow a lump sum on money
  • Personal loans usually come with a fixed interest rate, so you’ll always know what you owe
  • You may qualify to borrow large sums of money
  • You may qualify for a lower APR than with a credit card
  • Borrow what you need on a rolling basis
  • Funds are available when you need them, up to a predetermined limit
  • You may qualify for a 0% introductory interest rate valid for six months or more
  • You may be able to earn rewards on your spending
  • Subprime borrowers will have a hard time qualifying for good terms
  • Missed payments will hurt your credit score
  • Interest rates are typically variable, so your APR may increase
  • APRs can be high for borrowers with subprime credit
Fees Loan origination fees, late payment fees, prepayment penalties Annual fees, late payment fees, penalty APR for delinquent accounts

When opening a personal loan is a good choice

You know exactly how much money you’ll need

With a personal loan, you can borrow exactly as much money as you need. But if you borrow too much, you’ll end up paying interest on money you didn’t need — and if you borrow too little, you may not have enough funds to cover a big purchase or consolidate debt.

For these reasons, it’s best to take out a personal loan when you can really pin down your financial needs, like when you are:

  • Consolidating multiple types of debt into one payment
  • Paying down a deposit for a wedding
  • Financing a major purchase

If you don’t know how much money you need, consider opening a credit card or even a personal line of credit, another type of open-ended loan.

You can qualify for a lower APR than you would with a credit card

It’s critical to look at the overall cost of borrowing money, or annual percentage rate (APR), when deciding between a personal loan and a credit card. With a credit card, the interest rate is basically the same as the APR. But with personal loans, the APR includes extra costs, such as the loan’s origination fee, which can range from 1% to 8%.

Still, even with origination fees, a personal loan might cost you less. That’s because these loans often come with a lower interest rate than a credit card, especially for borrowers who have good or excellent credit. This means that even when a personal loan has an origination fee, it still might have a lower APR (and cost less in finance charges overall) than a credit card. The caveat: If your credit is only fair, you might see a huge difference in loan costs than if your credit is stronger. In the example below, a fair credit borrower would pay $4,283 more in interest over a five-year period on a $10,000 loan compared to an excellent credit borrower:

$10,000 personal loan cost: excellent credit vs. fair credit
Excellent credit borrower (760+ credit score) Fair credit borrower (640-679 credit score)
Loan amount and terms $10,000 over 5 years $10,000 over 5 years
Average best APR* 11.81% 24.89%
Monthly payment $221 $293
Total cost of the loan $13,289 $17,572
Amount paid in interest $3,289 $7,572
*According to the LendingTree Personal Loan Offers Report, April 2020

You want to consolidate several forms of debt

Personal loans can be a better way to consolidate debt. When you use a balance transfer to consolidate, you’re usually rolling over debt from one or more credit cards onto a card with a lower interest rate. But a personal loan can be used to pay for almost anything — and usually comes with fixed rates  — so using one to consolidate debt might be a less expensive and more efficient way to pay off debts such as credit cards, medical bills and even auto loans.

When it’s best to use a credit card

You can qualify for a 0% APR introductory offer

If you have good credit, you may qualify for a credit card that comes with a 0% APR promotion that lets you avoid paying interest on either new purchases or on a balance transfer, often for 15 months and sometimes longer.

The catch: If you don’t pay the balance off by the time the promotional period is over, you could end up paying deferred interest on what you owe.

You need a flexible borrowing amount

Personal loans come with fixed terms and monthly payments, but credit cards offer more flexibility when you aren’t quite sure how much money you’ll need. With a credit card, you can make purchases on an as-needed basis, which means you’ll only pay interest on the money you borrow.

You want to earn rewards for your purchases

Unlike a personal loan, using a cash reward credit card can help you score points, travel miles or cash back. It’s rarely wise to use this type of card just for the rewards if you plan to carry a balance and want to avoid excessive interest charges. Also, it’s usually more difficult to qualify for a rewards credit card than a regular credit card.

You can pay off your balance in full each month

A credit card can be a great way to borrow money on a short-term basis. But carrying a balance month to month can make everyday purchases more expensive. If you can pay off your balance in full every month, however, you’ll avoid interest charges. Further, you’ll help establish a healthy payment history that can improve your credit, while also benefitting from any rewards offered by your card.

Alternatives to credit cards and personal loans

Personal line of credit

A personal line of credit is a hybrid between a personal loan and a credit card. Like a personal loan, it comes with a predetermined borrowing amount and usually doesn’t require collateral (a secured personal line of credit will need collateral). However, a personal line of credit also lets you draw funds on an as-needed basis and only pay interest on what you use.

A personal line of credit might be a good option for a major expenditure, such as a home improvement project, when you’re not sure exactly how much money you’ll need. With a personal loan, you would still have to pay interest on the entire loan amount even if you used only part of it.

How it compares to credit cards: A personal line of credit may require a fee for every withdrawal, so a credit card might be better for everyday purchases.

How it compares to personal loans: A personal line of credit lets you borrow money only when you need it, while a personal loan comes as a lump sum, and you’ll owe interest on the entire amount.

Home equity loan and home equity line of credit (HELOC)

If you have equity in your home, you may be able to secure financing with better terms than with an unsecured personal loan or credit card. Home equity loans and HELOCs let you borrow against the value of your home, which means they typically come with lower APRs than unsecured forms of financing. However, they usually also come with extra fees and closing costs, and you risk losing your home if you default on either borrowing option.

Home equity is the difference between the current value of your home and your mortgage balance. Not sure how much equity you have? Use this home equity loan calculator to find out.

How they compare to credit cards: You may qualify for better terms with a home equity loan or HELOC, but you’ll also have to put your home up as collateral.

How they compare to personal loans: Borrowing against home equity typically gives you a lower APR than borrowing with a personal loan.

Payment plans and point-of-sale financing

If you’re thinking of opening a personal loan or credit card to finance a big purchase, you may want to explore point-of-sale financing options first. Many retailers, such as Amazon, Apple and Best Buy offer 0% promotional financing (and sometimes cash back) if you pay with a store credit card and pay off the balance within a set time, say 12 to 24 months. Some health care providers offer a similar arrangement by providing patients access to a deferred-interest medical credit card. Also worth considering: Third-party POS financing services, such as Affirm and Afterpay, which may be able to offer you 0% interest payback options as long as you pay off your balance in time.

Read the fine print, though. For most point-of-sale financing options, you need to pay off your balance before the 0% interest promotional period ends. If you don’t, you could be on the hook for back interest.

How these options compare to credit cards: You’ll still end up paying interest on purchases if you don’t pay your balance off before the 0% promotional period ends.

How they compare to personal loans: Personal loans offer fixed monthly payments, and you might be able to secure the same type of financing with a payment plan — and put off paying interest.


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