People who need to borrow money have plenty of options, but two of the broadest and most common are personal loans and credit cards. Several features separate the two and make each suitable for different purposes. This article will explain how personal loans and credit cards work, then dive into some situations where using a personal loan vs. credit card could make more sense for your needs.
How does a personal loan work?
Personal loans are loans borrowers can receive as a lump sum and repay in fixed, predictable payments of principal and interest. This structure makes these online loans excellent for predictable expenses, like large purchases or refinancing other loans.
When to use a personal loan
Here are some instances where a personal loan could make sense:
You want to finance a large purchase
Personal loans offer large amounts at lower rates and manageable payments. This can make them suitable for large expenses, such as furniture or home repairs.
You want to consolidate or refinance a loan
Consolidating loans involves paying off two or more loans with one new loan. Refinancing loans involves paying off one or more old loans with a new one at a lower rate. Since personal loans are typically fixed amounts with lower interest rates, they can be great tools for consolidating or refinancing your loans.
You want a lower interest rate
Many personal loans tend to charge lower interest rates than credit cards. As a result, you can potentially save more money with a personal loan.
How does a credit card work?
Credit cards are cards that let you borrow up to a certain limit, then repay at your leisure - as long as you make the minimum payment. To use a credit card, you can swipe the card, insert the chip, tap to pay, or use your card number if shopping online.
When to use a credit card
Here are some instances where using a credit card could make sense:
You want access to revolving credit
Revolving credit lets you borrow money whenever you need it up to a certain credit limit and repay at your leisure. This can make credit cards excellent tools for regular yet unpredictable expenses, such as gas, groceries, and car repairs.
You want to earn rewards
Many credit cards let you earn a percentage of your spending in cashback, depending on the category and card. For example, some cards earn cash back on all spending with no limits. Others may offer money back on quarterly rotating categories, like groceries or drugstores. This lets you save a few dollars on all your spending.
You want access to special features
Credit cards offer several special features, including:
- Signup bonuses: Cards may pay a few hundred dollars in cashback points for spending a certain amount in a specified time. For example, it may pay you $150 for spending $3,000 in the first three months after opening.
- Balance transfers: These let you move balances from other cards to the card in question. This can help you refinance debt and reduce interest. Balance transfer cards may offer 0% balance transfer APRs for 12 to 18 months, making debt payoff easier.
- 0% purchase APR periods: You can spread out purchase amounts over 12 to 18 months with 0% interest, depending on the card. This can make it easy to pay off large purchases.
The bottom line
Credit cards can work well for regular or unpredictable expenses that are smaller, like groceries or car repairs. They help you earn signup bonuses and rewards on these purchases, among other special features like balance transfers and 0% APRs.
On the other hand, personal loans offer fixed payments, larger loan amounts, and lower interest rates. As a result, they might be better for large, predictable, one-off expenses like home repairs or loan refinancing. Make sure to compare the features, pros, and cons of each option to make the right choice for your situation.
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