Personal loan vs. credit card: Which option is right for you?

Whether you're working on a home improvement project or paying an outstanding balance — if you're strapped for cash, you'll want some options. Two popular funding choices are a personal loan or a credit card. Choosing the best option for you will depend on a variety of factors, from the type of credit card to a loan interest rate.

Understanding the terms of both credit cards and personal loans is important, especially if you want to save money. Here's what you need to know about each, including how each can affect your personal finance.

Personal loan vs. credit card

If you're trying to pick between a personal loan and a credit card, you'll want to understand the definition of each, as well as some pros and cons.

Personal loans:

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.

A personal loan allows you to take a lump sum and pay it back over time. You can use it for any purpose, such as purchasing a vehicle, making a home improvement or consolidating debt.

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Pros

• Personal loans have upfront cost disclosures (you'll understand interest and fees before using the money)
• Personal loans have fixed monthly payments that can help you establish and stick to a budget.
• Most personal loans have a term that ranges from one to five years.
• Personal loans usually offer fixed interest rates.
• In most cases, you can pay off a personal loan early without penalty.
• As long as you make your regular payments, a personal loan will be paid off at the end of the term.

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Cons

• Personal loans can be more expensive than credit cards if the lender charges fees based on the balance.
• Unlike credit cards that offer an introductory period with zero interest, personal loans don’t offer interest-free options.
• Interest rates on personal loans can be higher than secured loans, such as automobile loans or mortgages.

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 card balances, you will be charged interest.

Pros

• Credit cards are a convenient form of funding because they’re easily acquired, especially if you have good credit. You can take out a credit card ahead of time and have it on hand when needed.
• Some credit cards offer low introductory rates, during which you aren’t charged interest.
• Credit cards are widely accepted, making it quick and easy to complete a purchase.
• When you pay off a portion of your credit card balance, you have the opportunity to borrow it again without having to reapply.
• Some credit cards offer cardholder rewards or benefits, such as free airline tickets or extended product warranties.

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Cons

• If you’re not disciplined, you could continue to add to your balance, which makes it difficult to get out of debt.
• If you choose a card with a zero- or low-interest introductory period and don’t pay it off before the promotion ends, your interest rate could end up being higher than a personal loan.
• Credit cards interest rates can be increased.

Personal loan vs. credit card: Which is right for you?

How you use the funds, how much you need, and how good you are at repaying your debt can impact whether a credit card or personal loan is the better choice for you.

Personal loans may be a good option if you:

• Need to borrow a large amount.
• Prefer a predictable monthly payment.
• Need a longer period of time for repayment.
• Would be tempted to reuse the available funds.

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Credit cards may be a good option if you:

• Need funds available on a revolving basis.
• Make smaller purchases.
• Are disciplined and can pay off your balance in full each month.
• Have good credit and can qualify for zero-interest promotions.

Credit card interest rates are typically higher than personal loan rates (though some credit cards offer zero or low interest for an introductory period). The rate you're offered on a credit card or personal loan depends on your credit score.

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Personal loans vs. credit cards for debt consolidation

Balance transfer credit cards and personal loans can be useful tools for debt consolidation.

Balance transfer cards: Some credit cards allow you to transfer the balance from another credit card, with offers of low or no interest for a set term. If you can pay off the balance within the introductory period, a balance transfer credit card may be a good choice for debt consolidation. Be sure to check if the credit card charges a transfer fee.

Personal loan: You can also take out a personal loan and use the funds to pay off other debt, such as loans with higher interests. This form of debt consolidation may extend the amount of time you have to pay off your balances and combine your amount into a single, lower payment. Another advantage is that a personal loan usually has a fixed interest rate.

Whether you decide to take out a personal loan or keep credit cards in reserve, make sure you shop around for the best interest rates and offerings. Loan product costs can vary greatly, and you want to be sure whatever you choose fits and furthers your financial goals.

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