No matter how well you manage your finances, there will likely come a time when you need to borrow money. Personal loans and credit cards are funding options you can consider. However, it is vital to note that while both share some commonalities, they are also different in so many ways.
The Similarities
Getting approved for a personal loan and a credit card largely depends on your finances and creditworthiness. Lenders will have to make sure that you have a good history of paying back debts and an ability to do so in the subsequent months to come. They do this by computing your debt-to-income ratio and evaluating your credit score.
Both personal loans and credit cards are often unsecured. This means you don’t have to pledge any assets such as your house or car as collateral. If you fail to repay the loan, your asset will not be in danger of repossession. Moreover, you can use it for almost any purchases you want.
The Differences
A personal loan lets you borrow a lump sum of money for just about any purpose and can help you with large purchases. It is usually paid back with interest for several years with a fixed monthly payment schedule. The repayment term tends to be two to seven years, depending on the loan.
On the other hand, a credit card is a form of revolving credit that helps you with smaller purchases. It gives you a line of credit based on your spending and a revolving balance that carries the interest. Your monthly payment will depend on how much money you’ve used in your account.
When To Use a Personal Loan
A personal loan is excellent when you:
- Qualify for a low Annual Percentage Rate (APR)– Low-interest rate personal loans can help you make your monthly payments more affordable and reduce your principal fast.
- Want to consolidate debt– A personal loan can be used to consolidate debts, especially those with high-interests.
- Need funds for a large expense– Personal loans can grant you a massive amount of money for your large expense, such as a home improvement project.
- Can make on-time monthly payments– Failure to repay personal loans will automatically bring a negative impact on your credit score.
The APR on personal loans typically ranges from low to higher interest rates. Those with a good credit score and a low debt-to-income ratio may be eligible for a low end of the range provided. Moreover, people can borrow up to $100,000 as long as they are qualified.
Personal Loans: Pros and Cons
Just like any other type of financing, personal loans also carry advantages and drawbacks, as stated below:
Pros:
- The fixed monthly payments can help you budget your finances
- They offer lower interest rates as compared to credit cards
- Lenders are capable of lending you fast cash through a personal loan for immediate purposes
Cons:
- Payment schedules are hard to adjust
- Higher interest rates and fees for people with bad credit
- You get a fixed amount of cash, not a line of credit
When To Use a Credit Card
A credit card is excellent when you:
- Need funding for smaller expenses– Credit cards are best for smaller purchases, such as your groceries that you can quickly repay in a short period.
- Are eligible for a 0% promotional offer– a credit card with a 0% promotional offer is a cheap way to pay for any purchases without interest.
- Can pay your balance each month in full– it is advisable to repay your balance each month to avoid being charged for interests.
Credit cards can be expensive only if you fail to pay for the balance each month or if you don’t qualify for a 0% promotional offer. Furthermore, credit cards usually carry high-interest rates. Having a high balance can affect your credit score negatively. That is why it is only best for smaller purchases, such as your daily expenses or monthly bills.
Credit Cards: Pros and Cons
To help you decide if a credit card is right for you, here are its advantages and disadvantages:
Pros:
- It can be used whenever you need it
- Easier to qualify with fair credit
- It offers interest-free purchases if you succeed to pay in full monthly
- It offers rewards to excellent cardholders
- Some offer 0% APR promotional periods
Cons:
- Some credit cards carry annual fees
- Credit cards that have high APR can be expensive
- Not all establishments accept credit cards as payment, and some even charge a fee to process payments
Takeaway
Personal loans are better for large purchases since they provide a lump sum of money, while credit cards are suitable for smaller purchases. Hence, if you require a huge amount of money, a personal loan is the right option for you. On the other hand, if you want easy access to cash to pay for smaller purchases, credit cards are best for you.