Personal Loans vs. Credit Cards: What’s the Better Choice?

When faced with a financial need, many individuals find themselves trying to pick between 2 popular options: personal loans vs. credit cards. While both can provide funds, each has distinct advantages and disadvantages to consider before making a choice. Let’s explore the key benefits and drawbacks of each, and the ideal time to use one over the other.

What is a personal loan?

A personal loan is a fixed sum of money borrowed from a lender, which is then repaid in regular monthly installments over a predetermined period. This form of installment credit can be used for a wide range of purposes, including debt consolidation, emergency expenses, home improvements, and more. Personal loans are available as both secured and unsecured loans, each with its own set of characteristics and requirements.

Credit cards are a popular form of revolving credit that allows individuals to make purchases, transfer balances, and obtain cash advances. With a credit card, the cardholder is granted a specific credit limit, which can be used repeatedly as long as the balance is repaid within the agreed-upon terms.

Personal loans vs credit cards: Choosing the right option

There are several factors to consider when choosing between a personal loan and a credit card. Your financial needs, repayment capabilities, and credit history can help guide your decision-making process. Here are some guidelines to help you determine the right option for your specific circumstances.

When to use a personal loan

Personal loans are generally better suited for larger expenses that will take more than a year to repay. The following situations illustrate when a personal loan may be an appropriate choice:

• Debt consolidation or refinancing: If you have multiple high-interest debts, such as credit card balances or medical bills, consolidating them into a single personal loan can simplify your financial life. Combining all your debt into a single, fixed-rate loan could potentially save you money on interest charges.
• Large home improvement projects: If you are planning significant renovations or home improvements that require a substantial upfront investment, a personal loan can provide the necessary funds without putting your home at risk.
• Unpredictable spending habits: If you tend to overspend when given access to a revolving line of credit, a personal loan can provide a disciplined approach by offering a fixed loan amount that cannot be increased once spent.

When to use a credit card

Credit cards are generally more suitable for short-term expenses and smaller purchases that can be comfortably repaid within a year. The following scenarios may indicate that a credit card is the better choice:

• Short-term financing needs: If you need funds for a brief period and can repay the balance within a few months, a credit card may be a convenient and cost-effective solution.
• Take advantage of promotional offers: If you have excellent credit and can qualify for a credit card with a 0% introductory APR, using a credit card for a large purchase or debt consolidation during the promotional period can save you money on interest charges.
• Convenience and flexibility: If you value the convenience of a revolving credit line and prefer the ability to make ongoing purchases without applying for a new loan each time, a credit card may be the better option.
• Building or improving credit: If you have limited credit history or are working to improve your credit score, responsible use of a credit card can help establish or rebuild creditworthiness.

Conclusion

The debate between personal loan vs. credit card requires careful consideration of your financial needs, repayment capabilities, and personal preferences. Personal loans offer the advantages of fixed monthly payments, lower interest rates, and the ability to consolidate multiple debts. Credit cards provide convenience, flexibility, and the opportunity to earn rewards. By evaluating your specific circumstances and understanding the pros and cons of each option, you can make an informed decision that aligns with your financial goals and helps you achieve greater financial confidence. Remember, always consult with a financial advisor or professional before making any significant financial decisions.

This article is for educational purposes only and is not intended to provide financial, tax or legal advice. You should consult a professional for specific advice. Best Egg is not responsible for the information contained in third-party sites cited or hyperlinked in this article. Best Egg is not responsible for, and does not provide or endorse third party products, services or other third-party content.