Personal Loans vs. Credit Cards: Which Should You Choose?

Personal Loans vs. Credit Cards: Which Should You Choose? It can be challenging to choose between a personal loan and a credit card, especially when an unexpected expense comes your way or if you want to make a big purchase. It’s essential to keep in mind that both options differ significantly. 

Personal Loans vs. Credit Cards
Personal Loans vs. Credit Cards

However, knowing what to pick between the two can help prevent financial challenges in the long run.

What’s The Difference?

A personal loan is an installment loan. This means you’ll be provided with a lump sum of money, which you’ll pay back monthly. Besides this, you can use a personal loan for almost anything. This includes medical bills minimum payment, debt consolidation, or for other significant purchases.

On the other hand, a credit card is a revolving credit. This means that you’re allowed to borrow funds multiple times. However, it’s vital to remember that the borrowed amount should not exceed the credit limit. Because of its characteristics, a credit card is deemed best for daily purchases like groceries, shopping, etc.

It’s also crucial to look at the differences between personal loans and credit cards based on the following factors in order to know which one best fits your needs:

Repayment Terms

When it comes to repayment terms, a personal loan will require you to pay fixed monthly payments, which include the loan amount and interest rates, during a set period. However, a credit card will ask you to pay the minimum required payment or the full accrued balance before or on the monthly due date.

Interest Rates

A personal loan typically has a fixed interest rate up until your loan ends. On the other hand, credit cards usually have a variable interest rate that arises on unpaid credit card balances.

Funds Disbursement

As mentioned earlier, a personal loan can provide you with the funds you need in a lump sum. This means that you’ll get the loan amount in full at once. On the other hand, a credit card will provide you with a revolving line of credit, which means you’ll have access to funds based on your approved credit limit.

Fees

Personal loans tend to have origination fees, late fees, prepayment fees, etc. On the other hand, credit cards tend to have late fees, annual fees, foreign transaction fees, etc. However, it’s vital to remember that fees vary depending on the lender. Thus, it’d be best to know first before applying for one.

Are There Any Similarities?

There are considerable differences between a personal loan and a credit card. However, they also have some similarities. Both funding options allow you to access funds, buy now, and pay afterward at a set period.

Also, both will require you to pay on time and be a responsible borrower to avoid having a bad credit score and secure a bright future regarding funding.

When Does Getting A Personal Loan Make Sense

It’d be best to take out a personal loan when you:

  • Qualify for a low annual percentage rate;
  • Need to finance a significant expense;
  • Want to consolidate multiple debts with high-interest rates;
  • Can pay back the loan according to the agreement.

Personal Loan and Your Credit Score

A personal loan can positively and negatively impact your credit score. However, this depends on how you use this type of loan. For example, if you apply for a personal loan, your lender will perform a hard inquiry, which will be reflected on your credit report and can decrease your credit score by a few points.

On the other hand, if you practice paying your loan on time, it can boost your credit score. This is mainly because your payment history covers 35% of your credit score. Thus, it’d be best to ensure that you can pay the fixed monthly amount of a personal loan before you decide to push through with your application.

When Does A Credit Card Make Sense

It’s vital to remember that credit cards are a better option when you:

  • Qualify for a 0% promotional offer;
  • Can pay back your account’s balances every month in full;
  • Need to finance smaller expenses.

Credit Card and Your Credit Score

Paying your credit card balance in full at the end of your billing cycle is crucial if you want to avoid a negative impact on your credit score. It’s vital to remember that if you don’t have a 0% introductory rate period and don’t pay the balance, the interest will start to accrue. This means that you might be paying for your purchases for quite some time.

Late payments, typically 30 days or more from the due date, can hurt your credit score. Also, a high balance on your credit card often leads to a high credit utilization ratio, which can be bad for your credit score. On the other hand, making on-time and total payments every month can increase your credit score in the long run.

To Wrap It Up

If you prefer a lump sum of cash for an expense, then a personal loan might be the one you’re looking for. However, a credit card might be more suitable if you would like to use the funds for smaller and everyday purchases.

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