Personal Loans

8 Times When You Might Want Personal Loan Over a Credit Card

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Swiping a credit card is convenient — but it comes at a cost. Credit cards have higher APRs that make this type of debt even more expensive. Americans paid $104 billion in credit card fees and interest in 2018. These high costs, along with low monthly payments, can keep borrowers in debt and paying interest for far too long.

If you’re looking to finance a big purchase or consolidate debt, you might wonder if there’s a better alternative to credit cards — one option is a personal loan.

Personal loans and credit cards are accessible forms of credit that can be used for a wide variety of purposes. But personal loans provide some key benefits that can make them a better way to borrow. Here’s a look at how personal loan and credit cards compare, and when you should apply for a loan rather than charge a card.

Personal loan vs. credit card: How they work

Personal loans and credit cards are both popular financing options. Asnsecured debt, neither product requires you to secure credit with an asset. This makes personal loans and credit cards accessible forms of credit that can be used to pay for almost anything.

If you know you’ll need to borrow for some upcoming financial obligations, you might be wondering whether a personal loan or credit card is right for you.

Benefits of a personal loan

Here are some solid reasons to consider a personal loan:

  • For applicants with a good credit background, personal loans can offer lower rates and beat the costs of borrowing with a credit card.
  • Borrowing with a personal loan rather than a credit card can help you build credit by improving your credit mix and keeping your credit utilization low.
  • You will have fixed monthly personal loan payments that are designed to pay off your debt.
  • You can borrow large amounts for a one-time purchase. A personal loan can be used to borrow anywhere from $1,000 to $100,000, so you can get exactly the amount of funding you need.


Benefits of credit cards

Credit cards aren’t always a bad idea, however. Here are some reasons to consider this form of financing:

  • Many credit cards offer an interest-free introductory period, during which you can borrow and repay balances at no charge.
  • Cardholders can also take advantage of their credit card grace period, which allows them up to 31 days to pay off a purchase in full to avoid any interest charges.
  • Paying with a credit card is convenient and easier, especially if you’re borrowing to make many smaller purchases over time.
  • Using a credit card to finance a purchase or refinance a debt can make sense if you can pay the balance off quickly, typically in a year or less.
  • Credit card perks and rewards can be enticing, but will only pay off if you repay the balance in full each month to avoid interest costs.


Both options have their merits

Overall, credit cards can make sense if you’re only borrowing a small amount that you can quickly repay. They also can provide opportunities to save by earning rewards or taking advantage of 0% introductory rates.

But it can also be too easy to overspend and get in over your head with credit card debt. If you need to cover a major expense, personal loans can be a more affordable and manageable way to borrow.

Personal loans tend to have lower costs than credit cards. In the third quarter of 2018, for example, the average actual credit card rate was 16.46%, according to Federal Reserve Bank consumer data. That’s nearly 63% higher than the 10.12% average rate on 24-month personal loans.

Here’s how those rates would add up if applied to a $5,000 balance repaid over two years:

    • Credit card: $245 per month and $901 in total interest
    • Personal loan: $231 per month and $544 in total interest

Personal loans also offer one-time funding with a fixed repayment plan, so you know how much you’re borrowing and when you’ll be out of debt.

8 times you might want personal loan over a credit card

The basic features of personal loans are better suited to some purposes over others. As mentioned above, a personal loan will most often be a better choice over credit cards when it’s used to finance a large, necessary one-time purchase.

Here are some examples of purchases that could be more affordable when made with a personal loan instead of credit cards.

1. Consolidating debt

If you’re interested in combining debt, such as consolidating credit cards, a personal loan can be a good option.

It will be the best option if you have a solid credit background and can qualify for rates on a debt consolidation loan that is lower than your existing APRs. But a personal loan can also be helpful if you want to simplify your debt and put yourself on a definitive track to pay it off.

Compare personal loans to all your debt consolidation options to make sure you pick the right one. A balance transfer to a new 0% introductory APR card, for example, could also be an option to consolidate debt, ideal for lower balances you can pay off during the introductory period that’s interest-free.

The LendingTool personal loan tool is a great place to start shopping for and comparing personal loan offers from lenders. Submit a few brief personal details and you may get matched with up to five lender offers in just a few minutes.

2. Covering medical costs

You can’t always predict or save up for medical costs, so you might not be prepared to cover a medical emergency or new diagnosis out of pocket. And while medical insurance is a must, many families might still face high deductibles and pay steep out-of-pocket prices. In these cases, personal loans can be an affordable way to borrow money to cover medical bills and repay them over time.

Personal loans can also be used to pay for procedures that are elective and not covered by insurance, such as weight loss surgery or cosmetic dental work.

Having an emergency fund in place to help pay medical costs is wise, as is delaying and saving up for elective procedures. You can also ask your medical care provider about reducing medical bills or enrolling in a payment plan to manage these costs.

3. Repairing or improving your home

An urgent home repair or timely home remodel can also be a good reason to take out a home improvement loan since these often carry high upfront costs.

A third of homeowners who completed home renovations in 2017 paid for some of the costs with a credit card, according to a survey from Houzz. But many borrowers could pay less interest by applying for a low-interest personal loan for home improvements, rather than use a credit card.

Home equity loans and home equity lines of credit are also popular financing options for home improvements. For non-emergency home improvements, saving up to pay for the project in cash is a wise move.

4. Moving or relocating

Relocating costs can quickly add up, especially if you’re facing a major move across state lines. Getting a personal loan for moving expenses can be a smart way to cover those costs without emptying your bank accounts or racking up high-interest credit card balances.

If your moving costs will be low or you’d prefer a credit card, opening a new introductory 0% APR credit card can be another affordable way to borrow for a move.

5. Making a major purchase

From a vacation to a home appliance, saving up for a major purchase is the best way to go if you can wait and put it off. But sometimes a big expense can’t wait — perhaps you need a travel loan to visit an ill family member, or you’re scrambling to pay to replace the refrigerator that finally quit on you.

A personal loan can help you pay for a major expense, and repay it at a lower APR than you might pay on a credit card.

6. Developing your career

Professional courses, boot camps, and certifications can be a great way to improve your credentials and help you take your career and income to the next level — but they aren’t always cheap.

Using a personal loan to pay for professional development programs can be a smart way to give your career a boost and increase your pay. Just make sure you research the opportunity and are certain it can lead to better job opportunities.

7. Growing a business or side hustle

Another opportunity to grow your income could be starting a business or side hustle. If you want to begin or grow a business venture, however, you might need some capital on hand to cover initial costs to get it up and running.

A personal loan can be an affordable way to get access to cash your business or side hustle need to generate more income. Look into small business loans, too, to see if you qualify and how your offered rates and terms would compare.

8. Planning a family

Starting or growing your family can also add to your financial pressure. But for parents who need to pay for infertility treatments or are choosing to adopt to add to their family, the costs can be even higher.

Adding to your family might not be something you’re able or willing to put off and save for, so the situation might call for credit. A personal loan can be a way to borrow for adoption costs or infertility treatment expenses while keeping interest costs and monthly payments manageable.

Before you decide, research and compare options

Borrowing will always come with some costs and risks — no matter what type of credit you choose. So be cautious with credit and look for other ways you could come up with the funds you need.

Pay for cash when you can. Many major purchases, such as vacations or travel, can be delayed to give you time to save up an pay for them in cash. You might also be able to tap existing savings to cover costs or pick up extra work to generate extra funds.

If you have to borrow, keep costs low. Whether you decide to go with credit cards or personal loans, you should watch your costs. Research rates and watch out for fees. Some personal loans don’t charge origination fees, for example, while others do. Many credit cards also have annual fees or balance transfer fees.

Consider other products along with personal loans and credit cards. Don’t limit your search to just credit cards and personal loans. For some people, other options such as home equity loans or lines of credit could be advantageous ways to borrow. Comparing costs and APRs can help ensure you’re choosing a product that will make borrowing more affordable.

Find the best lenders and products. If you’re leaning towards an introductory 0% APR credit card or a personal loan, it’s important to find the best deal. Shopping around for a personal loan can help you get big savings — shopping around for a better personal loan rate saved 35%, on average.

How you borrow can make a big difference in how easily you can get funds now, how much you’ll pay to borrow that money, and how long you’ll be paying it off. Ultimately, you’ll need to take your own financing needs and situation into account to decide whether a credit card or personal loan is right for you.


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