Personal Loan vs Credit Card: Which is the Best Option?

Are you searching for ways to borrow money to pay off a debt? Are you looking for loan options to help buy that new vehicle? If so, then perhaps you are deciding between a personal loan and a credit card.

According to the Census Bureau, around 183 million Americans own at least one credit card. About 104 million of which own a Visa card. Around 83 million, on the other hand, own a MasterCard. 

On the flip side, roughly 83.5 million people apply for personal loans annually. 

In the personal loan vs credit card debate, which option should you go for? Which is the wiser decision, financially-speaking? 

Continue reading below as we try to settle the score once and for all.

Personal Loan vs Credit Card: Settling the Debate

People apply for big or small personal loans for many different reasons. The same thing goes for people who apply for a credit card. Regardless of the reason, some factors will tell you which one is the better choice.

Let’s try to break down these key factors. Let’s try to settle the personal loan vs credit card conundrum and determine which one you should go for depending on your current situation.

How Do They Work?

First, let’s tackle how personal loans and credit cards work. A personal loan involves money that people borrow from a credit union, bank, or online lender. Borrowers pay the loan in fixed monthly payments. 

Generally, the payment period ranges between two and five years. As for the interest rates, they are somewhere around 6% to 36%.

Another key characteristic of personal loans is they don’t require any collateral. 

Personal loans are similar to student loans, auto loans, and a mortgage. You will apply for a specific amount, and the lender will look into your financial history. They will examine your credit report to see if you qualify for the loan.

They will determine if you are capable of paying the loan including the interest rate. If your credit score is good, they will likely approve your application. They may also give you a lower interest rate. 

You may consider personal loans as lump-sum loans. This means you receive the entire amount of the loan all at once. Thereafter, you can longer borrow more money from the lender. 

Meanwhile, a credit card is a line of credit. Through the card, you can borrow money at any given time. But you can only spend up to what your credit limit permits.

There’s the freedom to use the credit card whenever you feel like it. The bank or credit card company expect you to pay the balance by the end of the month. However, you have the option not to pay the balance.

This will result in an additional interest rate that you will have to settle in next month’s cycle. 

Pros and Cons of Personal Loans

Now let’s take a look at the advantages and disadvantages of personal loans. First, personal loans offer friendly payment terms. Most lenders will chop your payments into monthly installments.

This means you can find a way to squeeze in the payments within your monthly expenses. Furthermore, personal loans are easy to acquire. Compared to other loans, personal loan lenders are more lenient. 

They only conduct a few credit checks.

Another advantage of personal loans is that they keep you from overspending. Since a personal loan involves a fixed amount of money, there is no way for you to overspend even if the temptation is staring in front of you. 

Another benefit of personal loans is the repayment term. This means you have the option to secure a long-term or short-term payment term. A long-term payment scheme means you will pay a smaller monthly amount.

The downside is that your loan will come with a higher interest rate. This brings us to the cons of personal loans. The interest rates equate to higher payments in the long run. 

Compared to credit cards, personal loan payments are generally higher.

Additionally, you will likely have to pay certain fees and penalties. Some lenders charge upfront fees, origination fees, and prepayment penalties. Before signing the contract, make sure to clarify these charges with the lender.

Pros and Cons of Credit Cards

There are many advantages you may enjoy from credit cards. First, is the easy access. As long as you have available credit, you can use the card immediately. 

Another advantage is the introductory deals. These are the 0% interest rates the banks offer to new credit cardholders. 

You can also settle your payments via installments. Sure, it is advisable to settle your debts in full. But sometimes, things happen that leave you short on cash.

In such instances, you can settle only a portion of your balance and worry about the remainder the following month.

If you use your credit card wisely it can help increase your credit score. Proper use of the credit card means paying your dues on time.

Also, your credit cards can help during emergency cases. When someone in the family ends up in the hospital, you can rely on the credit card to cover the expenses if your savings is not enough.

As for the cons, there is the temptation to swipe and spend more than what you can afford. Its interest rates and fees are sometimes too steep. There is also the potential danger of credit card fraud.

Hackers may attempt to steal your personal information. Once they get a hold of your details, they can use your credit card for fraudulent purposes.

Of course, there is the risk of falling into a huge debt hole. 55% of Americans who own credit cards are in debt.

Personal Loan vs Credit Card: The Verdict

When should you go for a personal loan? When should you rely on a credit card? If you are planning a huge purchase that will take more than a year to pay off, a personal loan is the better choice. 

If you wish to consolidate your high-interest debts, a personal loan is the way to go. If you have a good credit rating and you are capable of covering the monthly payments, a personal loan is your best bet.

On the other hand, using a credit card is better for smaller purchases. It is also the better option for consolidating smaller debts that amount to a couple of thousands of dollars.

Increase Your Financial Knowledge

Resolving the personal loan vs credit card debate is crucial if you wish to build your wealth. But it is only one of the many aspects of personal finance that you should understand.

We encourage you to keep on learning about money and finance. We invite you to check our other articles. We provide tips, comparisons, and advice that will help you make the right financial decisions.