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. The cardholder is granted a specific credit limit, which can then 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: Having 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: When 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.

When to use a credit card

Credit cards are more suitable option for short-term expenses and smaller purchases. 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: Excellent credit could qualify you for a credit card with a 0% introductory APR. Using this credit card for a large purchase or debt consolidation can save you money on interest charges.
• Convenience and flexibility: A credit card may be the better option, if you value the convenience of a revolving credit line and prefer to have the ability to make ongoing purchases without applying for a new loan each time, may be a good option.
• Building or improving credit: Someone with limited credit history or if you are working to improve your credit score, the responsible use of a credit card could 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 circumstances and understanding the pros and cons, you can make an informed decision that aligns with your financial goals. 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.