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Personal Loans vs. Credit Cards
Choose the right type of credit for your financial needs

If you’re in need of funds for a major purchase, an unexpected bill or smaller expenses, the two most common solutions are taking out a personal loan or putting the amount on a credit card. However, it’s important to choose carefully based on your financial situation, as these tools offer dramatically different advantages and drawbacks.

Advantages of personal loans

Taking out a personal loan from a financial institution comes with numerous advantages. Perhaps most importantly, personal loans provide a strong degree of predictability and stability. When you accept the loan, you should expect to pay the same amount each month at the same interest rate. You’ll also know exactly how long it should take to pay off the loan. This makes for a major advantage over credit card debt, which can be stretched out indefinitely with minimum payments — costing you significantly more in interest over time.

A personal loan can be a powerful financial tool. If you have strong credit, not only do you lock in a steady interest rate, but that rate is also likely to be lower than what you’d get from a credit card. This makes a personal loan a less expensive option for a large purchase or series of expenditures that you’d prefer to pay off over a longer period of time. It’s also a helpful way to consolidate credit card debt at a lower interest rate.

Once you’ve been approved for a personal loan, you’ll typically receive the money all at once to spend however you see fit (an exception to this is if you take out a secured loan for a specific purpose, like purchasing a home or a car). Writing for The Balance, Justin Pritchard notes that a personal loan can be especially convenient if you want to pay cash for something — unlike credit cards, which usually charge a fee.

Advantages of credit cards

Although credit cards tend to be a riskier and less predictable form of debt, they do hold some advantages. Instead of providing you with a specific, one-time amount of money, a credit card gives you flexible access to what’s known as revolving credit — a balance that you can draw on at any time within your credit limit. That means you won’t need to apply for a new loan each time you want to make a purchase, which can be helpful if you require funds immediately. And even if you don’t use your card at all, the balance is there if you need it.

Per Amrita Jayakumar and Steve Nicastro of NerdWallet, with their ease of use and flexible terms, credit cards are especially convenient for online shopping or for routine expenditures like gas and groceries — provided you pay the full balance each month. Depending on the card you apply for, you might even be able to get cash back, reward points for certain purchases, or an introductory 0% interest rate. Make sure you prioritize paying what you owe in a timely manner, though, as these types of purchases can pile up quickly and leave you with a large balance that exposes you to heavy interest charges.

If you need to make a large purchase or borrow a large sum that you can pay off steadily over time, a personal loan from a financial institution is likely to be your best bet. If you’d prefer a versatile line of credit for smaller purchases that you can pay off quickly, consider applying for a credit card. With both options, make sure you understand the terms of the debt you’re taking on so you can make a decision that’s wise for your financial health.



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Disclaimer - All content contained in this newsletter is for informational purposes only and should not be relied upon to make any financial, accounting, tax, legal or other related decisions. Each person must consider his or her objectives, risk tolerances and level of comfort when making financial decisions and should consult a competent professional advisor prior to making any such decisions. Any opinions expressed through the content in this newsletter are the opinions of the particular author only.
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