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You’ve heard the old advice that it’s always better to save – and it’s true. But that’s not always possible, and for those times you may need to decide which type of financing wins in the battle between a personal loan and a credit card.
Both options can help you get the money you need, but on very different terms. Depending on your financial goals and your circumstances, one might be a better option than the other.
Key differences: credit card vs. Personal loan
The biggest difference between credit cards and personal loans is that they involve different types of credit.
Credit cards are revolving credits, which means you can borrow money as needed, and your payments are based on how much of your outstanding balance at any given time. Personal loans, on the other hand, are installment loans, in which you receive your money in a lump sum and then repay the loan in equal installments over time.
These two differences help to determine the other characteristics of these loans:
When should you use a personal loan
Personal loans are generally best when you have large, one-time expenses, like car repairs or home renovation projects or if you are consolidate high interest rate debt in one loan with a lower interest rate. According to a 2019 study from the Experian credit bureau, people took out personal loans to:
Finance a major purchase: 28%
Consolidate debt: 26%
Pay for home improvements: 17%
Refinance existing debt: 9%
Pay for something not in the list above: 30%
Advantages of the personal loan
The main advantages of personal loans over credit cards are that they usually offer a lower interest rate and regular, even payments until you pay off the debt. This predictability makes it easier to build your budget and you know exactly when you will run out of debt.
Personal loans also have a wide range of uses – just about anything, in fact, except for higher education and illegal activities. Each lender differs in how quickly they can get your money to you if it’s approved, but some lenders even offer same-day financing.
If you have good credit, it is also quite easy to get approved, but there are still lenders who specialize in personal loans for bad credit. You may need to pay a higher rate or get a co-signer. You can also put up collateral to get a secured loan, like your car or your bank account.
Disadvantages of the personal loan
Personal loans are meant to be taken out infrequently and for large expenses, so if you need financing to make smaller purchases on a more regular basis, a personal loan might not be right for you. Personal loans don’t offer any rewards either.
When to use a credit card
Credit cards are for smaller, more frequent expenses that you can pay off relatively quickly. We even recommend that you pay your entire bill before the due date. Credit card companies only charge you interest if you carry a balance from month to month, so paying it off in full essentially gets you a free short term loan.
When you do it this way, you can even put all of your expenses on one rewards card, you get all the benefits without having to pay interest. The key here is discipline, however; it’s often too easy to start charging more than what you can afford, and the rewards you earn won’t outweigh the interest you owe.
Many credit cards also offer a 0% introductory APR period on purchases or balance transfers. If you’re looking to make a big purchase or consolidate other credit card debt at a lower rate, you may want to consider a credit card. Make sure you can repay the balance before the end of the 0% APR period.
Advantages of the credit card
If you use your credit card for your daily expenses and have the discipline to pay it off in full each month, this type of financing can be a powerful way to earn cash back or travel rewards. Some people pay all or part of their vacation in this way.
But even if you can’t do it, credit cards can still be a good fallback when the going gets tough. If you haven’t built your emergency fund, a credit card can help bridge the unexpected spending gap. You can instantly get the cash you need by simply swiping a card.
Finally, for true cost reducers looking to save money on new purchases or pay off existing debt, open an introductory 0% APR card and pay the fee before the introductory period ends. can also be a good idea. This is pretty much the cheapest fundraising strategy you’ll find.
Disadvantages of the credit card
One of the biggest advantages of credit cards – the ease of buying things just by swiping them – is also its biggest drawback. Because it is so easy to use a credit card, many people go into debt. After all, the minimum payment is usually quite reasonable.
But if you take a closer look, making the minimum payment (especially with the high interest rates that credit cards typically carry) means you could be paying off that same balance for years to come. And that’s assuming you don’t charge extra on the card.
Consolidate the debt? Personal loan vs credit card
First of all, we recommend that you check if your credit score is good enough to apply for a personal loan or credit card. Most credit cards require a good credit score of at least 690 or an excellent credit score of 720 to qualify. If your credit isn’t the best, it can be difficult to get approval for the right credit card, and a personal loan might be your only option. Some best personal loans require a credit score as low as 580.
Then we recommend that you use a personal loan calculator to estimate how much it would cost to transfer your debts into one loan.
Finally, calculate the cost of a 0% APR credit card offer. This is usually the cheapest option, but balance transfer cards often include a 3% or 5% balance transfer fee, so it’s important to compare whether you’re really saving money.
You don’t have to choose between a simple credit card and a personal loan. Here is some other options to consider depending on what you need:
Mortgage loan. It is one way to borrow against the equity in your home. You can often benefit from low interest rates this way, but if you don’t keep up with your monthly payments, you risk losing your home.
Cash-out refinancing. You can refinance your current mortgage with a larger loan and pocket the difference in cash. It may take a while, but can be a good option if you need to borrow money and get a lower mortgage rate at the same time.
Home equity line of credit (HELOC). This is similar to a home equity loan, except that you have access to a line of credit that you can use during a drawdown period, followed by a repayment period. You will only pay interest on the money you use.