Loans and Credit

Loans and Credit Cards

What’s the difference between a Personal Loan and a Credit Card?

Credit card or Personal Loans? The answer depends on what you’re buying and how you intend to pay it back.

When you’re in the market to make a major purchase but don’t have all the cash on hand, borrowing funds can be a viable route. It usually comes down to two options: Credit Cards and Loans. Both have pros and cons, but choosing the one that best suits your financial situation could save you money in the long run.

How do Personal Loans and Credit Cards work to benifit you?

Personal Loans and Credit cards are both types of credit that you have to repay with interest. However, there are some differences between the two.

  • Personal loans come in a lump sum. You have a predetermined amount of time to pay them off, usually between one and seven years. On top of interest, you might also have to pay application, origination, monthly or prepayment fees.
  • Credit Cards are a revolving form of borrowing, so they can theoretically last a lifetime. There’s a cap on how much you can borrow each month and you have to make at least a minimum monthly payment on your balance. 

Main differences between Personal Loans and Credit Cards

Benefits and drawbacks of a Personal Loans

Benefits

  • Lower interest rates than credit cards
  • Repayment schedule means your debt comes with an end date
  • Can be cheaper in the long term
  • No temptation to overspend

Drawbacks

  • Minimum loan term means that you’ll carry the debt for more than a year
  • Can be inflexible (may not offer early repayments)
  • Can take longer to apply for

Suitable for

  • Large one-off purchases like cars or home improvement
  • Large debt consolidations
  • Borrowing over a long period of time
Loans and Credit

Benefits and drawbacks of a Credit Cards

Benefits

  • Immediate spending
  • Can come with rewards
  • Convenient option if you need a constant cash flow
  • Balance transfer for debt consolidation
  • Interest-free grace period

Drawbacks

  • Usually carry higher interest rates
  • Only requires a minimum repayment each statement period, which means your debt can accrue interest indefinitely

Suitable for

  • Smaller purchases
  • Small debt consolidations
  • Everyday shopping or retail purchases to earn reward points
  • Spending amounts that you can be paid back within the interest-free introductory period

How to compare Personal Loans and Credit Cards

  • Interest rates. If you compare interest rates, generally personal loans are cheaper. The true cost is reflected in the APR, as you need to consider any fees as well.
  • Fees. Personal loans may come with an application fee or origination fee, among other fee types. Credit cards usually just have the annual fee, if there’s a fee at all.
  • Your financial situation. If you have good control over your spending and you regularly follow your budget, then a credit card could be suitable and even help you earn money through rewards and cash back. On the other hand, a personal loan offers the structure some people may need to repay debt timely.
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