Personal Loans Vs. Credit Cards

Personal loans and credit cards can save the day when you are in need of money. Both let you spend the amount you borrowed at your own discretion and pay back the money over time without collateral.

But each option has its share of pros and cons, and what works best for you depends on a number of factors, including the amount, payment period and purpose of the loan.

Personal loans

With a personal loan, you can borrow money with fixed terms to fund a home renovation, to cover hospital bills or to consolidate debt. A fixed interest rate is set, a fixed monthly payment is agreed upon, and a fixed repayment schedule is followed. Companies typically let you borrow a maximum of $35,000, with some offering a higher amount to those who are eligible. You can shop around online or drop by banks and credit unions in your area.

Personal loans make for a better fit if you are looking to borrow a huge amount over an extended repayment period. With a fixed interest rate, you can prepare your budget accordingly and not worry about unexpected increases. And because you have several years, you can consolidate debt and pay that off at a lower interest rate.

With credit cards, on the other hand, the interest rate and payment can change from month to month depending on how much you owe. And while introductory offers may reward you with 21-month balance transfers or zero percent interest in certain purchases, this is temporary only and you’ll end up spending more on interest rates.

Also, a credit card won’t come in handy if you need money to pay someone in cash such as a relative or friend whom you owe a debt.

Just note that you will need to a good credit score to be eligible for a personal loan and that charges often include an origination fee equivalent to 1 to 8 percent of your balance.

Credit cards

With credit cards, you get a line of credit that you can use for purchases, a cash advance or balance transfers.

This is your best bet if you don’t have a set amount that you need to borrow upfront or only need a relatively small amount that you will be able to pay off in a short period of time.

You can even avail of an interest-free loan with certain credit cards. These zero percent APR offers let you make purchases or balance transfers with no interest if you can pay it off before the offer ends, usually within a year or longer. Or you could simply pay off your balance in full each month and you won’t incur any interest charges.

Avoiding interest fees by paying in full and on time can save you a lot, or what would amount to up to 15.5 percent. Credit card interest rates actually vary based on your month’s balance, and if you can’t pay in full there’s a minimum payment (about 2.5 percent of your balance) that you still need to cover every month.

Not knowing how much you will need to set aside monthly for credit card payments makes it harder to plan or maintain a budget. On the upside, if you can pay your balance regularly and aren’t charged interest, you can accumulate rewards of all kinds. Rewards on purchases can be in the form of points or miles and used for cash back, shopping or travel purposes.

Keep in mind though that it is common for credit card companies to charge extra fees such as annual, late, cash advance, over the limit, balance transfer and foreign transaction fees.

Personal loans and credit cards can both be helpful. The question of which option will better suit you, however, depends on your financial need and situation. So take the time to calculate how much you actually need, how much you can pay monthly, and how soon you can repay the amount you borrowed. All these can be key to solving your money woes.

You also need to be aware of the risks and drawbacks of each option, so you can weigh these alongside with the benefits. It’s imperative to do extensive research about this matter so you can make informed decisions.