Personal Loans vs. Credit Cards: What’s the Difference?

If you have ever browsed the internet looking for a loan, you have probably came upon personal loans and credit card loans. But which one is better, a personal loan or a credit card? Here we will explain furthermore about them to help you make the best decision that suits you and your needs.

When you are looking to take out a loan, there are plenty of options to choose from when it comes to personal finances. The biggest decision is whether to use a credit card or a personal loan. Both of these options come with their own sets of pros and cons. That’s why it’s important to understand their differences before choosing one.

Credit cards can be a good way to finance small purchases or emergencies. They are very easy to use, and they can come in handy. With that said, they can be very expensive, especially if you carry a balance from month to month, which can result in credit card debt. The credit card interest rate vs. personal loan rate is much higher. On the other hand, personal loans can be a great option if you are looking to make a bigger purchase or consolidate already existing debt. Usually, they come with lower interest rates in comparison to credit cards, but they do require more planning and discipline in regards to paying them off.

So, how to know which one is better, credit card loans vs. personal loans? Well, it all depends on individual matters. If you are capable of repaying your balance in full each month, a credit card loan can be a good option for you. However, if you are looking to finance a larger purchase or consolidate existing debt, a personal loan is a better choice.

Personal Loans: Advantages and Disadvantages

In talks about personal loans, they offer multiple advantages in comparison to credit card loans. Here we will give you some of them:

• Lower interest rates
• Fixed payments
• Shorter repayment terms

Now with all of this said, they do have some downsides to them.

Here are some of them:

• Origination fees
• Strict repayment terms

Let’s explain the pros and cons a little bit more.

Advantages

As we mentioned above, personal loans have a couple of advantages to them. They come with lower interest rates which can ease up your monthly payments. This can save you money in the long run. Another great thing that they bring is a set repayment period, so you know exactly when the loan is going to be paid off. All of this can make your budgeting easier. Finally, personal loans can help you improve your credit score if you make payments on time.

Disadvantages

We listed their disadvantages, so let’s explain them a bit more. The first one is that personal loans are mainly used for bigger purchases, like buying a house or a property. Even though they have set repayment terms, they tend to be very strict and range from two to five years. For some people, that time might not be enough. Finally, personal loans require a good or excellent credit score in order to be able to qualify.

Credit Cards: Advantages and Disadvantages

Credit cards can be an amazing way to build your credit and earn rewards, but they can also be very expensive if you carry a balance.

Here are some pros to using a credit card:

• They can be used anywhere
• It can help you build up your credit
• You can get cash backs or points
• Bigger protection against fraud

We listed some good sides but let’s take a look at the downsides.

Here are some setbacks:

• Higher interest rates
• Easy to overspend and end up in debt
• Required minimum purchases in some businesses

Let’s explain them a little bit more.

Advantages

So, let’s start with some key advantages that credit cards bring. The first one being is that you can use your credit card pretty much anywhere these days, and it can come in handy. Another great thing is that with them, you can build up your credit score, which can help you down the road.

Also very important to mention is that if you frequently use your credit card, you can receive cash backs or points that you can use later for travel or shopping.

Disadvantages

Now that we talked about their pros, let’s take a look at their cons. When it comes to credit cards vs. personal loan interest rates, credit cards come with much higher rates. This can result in debt if you are unable to repay it back. Also, if you have a higher limit on your card, it’s easy to overspend money and go into minus.

When to Use Personal Loans?

If you are looking to take out a personal loan, you might be wondering what you can use it for. Well, generally speaking, personal loans are used to finance bigger purchases like a house or a property but can be used for other things as well.

Simply put, personal loans can be used for pretty much anything. Some people use them to consolidate debt, while others use them to finance large purchases. With them, you can even renovate your house or pay your medical bills.

Here are a few scenarios in which you can use personal loans:

• Consolidate debt – With a personal loan, you can repay back debt on your credit cards. If you repay it back in one monthly payment, you can save up money on interest rates and get out of debt faster.

• Financing a larger purchase – If you are looking to buy a car or to finance a wedding, this can be a great option for need funds.

• Unexpected expenses – In case you have a financial emergency, or you need to pay your medical bills, personal loans can be a good option for you.

When to Use Credit Cards?

Credit cards can be an amazing tool for managing your finances and building your credit history. Even with that said, it’s not good to use them in every situation.

Here we will give you scenarios when it’s good to use credit cards:

• Bad Credit – If you are unable to qualify for other types of loans because you have a bad credit score, credit cards can be a good option for you.
  
• Need the money fast – If you are looking to get cash fast, credit cards offer a great solution for that since everyone has them.
  
• Easy to withdraw cash – When it comes to credit card loans, they offer you easy cash withdrawals with no fees.

• Improve your credit score – This is the most important thing since with a better credit score, you have better options later if you are looking to take out a loan.

Alternatives for Personal Loans and Credit Cards

We discussed paying off credit cards and personal loans, so before you take out any one of them, we will give you some alternatives to think about.

Here are some alternatives:

1. Home Equity Loan – With this type of loan, you are borrowing money against the value of your home.

2. 401k Loans – You are borrowing the money against your 401k account, and it can be a good option if you have good savings but don’t want a personal loan.

3. Personal Savings – If you have a good amount of money saved, you can use that instead of taking out a loan.

4. Family and Friends – You can always ask friends or family if you are in need of a small amount of money without taking a loan.

Final Thoughts

In this article, we discussed personal and credit card loans, which one is better, as well as their pros and cons. Even though we can’t tell you which one would suit you the best, we gave a rundown of both of them.

At the end of the day, whichever one you decide to take out, it all depends on your personal situation. Just remember to consult with a financial advisor before you put your name on the dotted line and compare which one would be the best one for you.