Personal Loans vs Credit Cards as Personal Borrowing Options

January 12, 2021

Sudden car repair expenses. A holiday you can’t quite afford. A low-cost business start-up you want to fund personally. It sounds like you need to borrow some money. Where should you get it?

Personal loans versus credit cards

Two common personal borrowing options are personal loans and credit cards. While similar in that they’re based on personal credit histories and issued to an individual (or perhaps spouses), there are also differences that may make either personal loans or credit cards a better option for your specific financing needs.

Here are some things you should consider in the personal loans vs credit cards debate:

Personal Loans

  • Personal loan amounts can vary greatly. You can borrow just a few hundred or a few thousand dollars from some banks, or you can borrow much larger amounts (such as in the case of car loans or home loans). You shouldn’t have a problem finding a personal loan with limits that meet your needs (assuming your credit history makes you eligible).
  • Personal loans can have lower interest over the life of the loan when compared to credit cards, making them ideal for purchases of very large ticket items (like cars, boats, homes, or expensive family holidays).
  • Personal loans will begin to accrue interest immediately without any grace period.
  • Personal loans are paid back on a fixed schedule. For example, the loan might have a two-year term. This limits the amount of time you can pay back your loan.
  • With personal loans, you may have to pay additional charges if you want to pay more than your required monthly payment (either you stretch it out and pay the interest, or you get slapped with a fee for paying things off early).

Credit Cards

  • While credit card limits can also vary quite a bit depending on your credit history, they’re more ideal for smaller purchases of no more than a few thousand dollars (you generally wouldn’t use a credit card to purchase a car outright for example).
  • Credit cards are a “revolving line of credit” with no term limits. What this means is that you can continue to borrow against your credit limit after you’ve repaid previous purchases. You can use a credit card over and over again, and continually pay it off without a “deadline” like a personal loan. (Note: Some banks do offer personal lines of credit that are also revolving.)
  • Credit cards, unlike personal loans, generally include an interest-free period (usually around 55 days) where you can use the card for purchases without paying interest. Some credit cards offer regular grace periods (where no interest is charged as long as you pay off the card in full each month), which can mean bigger savings over a personal loan even if the loan carries a lower overall interest rate.
  • Credit cards are ideal for many small purchases as opposed to one large pre-planned purchase. They can be used almost anywhere these days, whether you need to buy groceries or make hotel reservations, and you don’t have to get cash from the bank to carry around with you.
  • Credit cards will often charge more interest in the long run over a personal loan. That includes credit cards with low or no interest rate introductory periods. In reality, there are usually terms tied to the card that keep those low rates (or grace periods) in effect only as long as you pay the balance in full every month, and the rates expire to reveal much higher interest rates.
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Tip:Before deciding on a personal loan or credit card for financing your next big purchase, decide on your needs. Will you need access to money periodically, but don’t want to carry around cash or go to the bank each time? Then go with a credit card. Do you want low interest, but you don’t want to have to pay off the entire debt within a month? Then go with a personal loan. One isn’t “better” than the other in the grand scheme of things – they each have their own purposes, and it’s up to you to choose the option that fits your needs and use it responsibly.

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