When an unexpected expense comes your way or you’ve been wanting to make a larger purchase, choosing between a personal loan or a credit card can be difficult. There are distinctions between the two, and knowing when to use your credit card or take out a personal loan can prevent financial hardship down the road.
If you need to take out a large lump sum of money for a project or want to pay off high-interest credit card debt, then you may want to consider a personal loan. If you’re making a smaller, everyday purchase, a credit card may possibly be the better option.
Here’s a look at the key differences between a personal loan and a credit card and how to determine which option is best for you.
Personal Loan Vs. Credit Cards
A credit card is a revolving line of credit you can use at any time up to your credit limit. You are required to make a minimum payment each month and have the option to pay more or pay it off every month. If you carry a balance, you will be charged interest.
A personal loan is a fixed amount that you borrow and pay back in equal installments over a certain amount of time. You are charged monthly interest from the time you sign the paperwork and receive the money. In most cases, you can pay back the loan before the end of the term without a penalty.
Credit card interest rates are typically higher than personal loan interest rates, although some cards offer zero or low interest for an introductory period. The rate you are offered on a credit card or personal loan will depend on your credit score.
“I can pay the money back quickly”
If your need is immediate — say, to pay a bill before your mid-month paycheck arrives in your checking account — go with a credit card. Unlike a debit card or cash, where you part with your money right away, a credit card allows you a break until you have to pay up. It’s like free, short-term financing.
But the “short term” is a very important qualifier. Before you use a credit card to cover your need, be sure you can pay off the balance in full by the due date. Otherwise, because credit cards come with a higher interest rate, you’ll end up paying quite a bit for the privilege of borrowing.
“I will need time to pay the money back”
If you need money for a bigger goal — a vacation, or perhaps you want to open your dream coffee shop — a personal loan from a financial institution such as Heritage Credit Union might be the better option. In these instances, you’ll need to pay back the larger loan over time. And in that case, you’ll do yourself a favor by choosing the option with the lower interest rates.
You can also use a personal loan to consolidate your credit card debt, that is, to combine your balances into one loan that may come with a lower interest rate. But before you rush to sign up, know that this isn’t for everyone. Consider carefully your specific situation before making such a move.
Personal Loan vs Credit Card: It Depends
Your situation and how eager you are to get out of debt are two factors to evaluate when considering a personal loan vs credit card loans. If you have low credit, search for a zero APR credit card. If you need the motivation of a deadline and have higher credit, choose a personal loan.