Loans and Credit
What’s the difference between a Personal Loan and a Credit Card?
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
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
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
Large one-off purchases like cars or home improvement
Large debt consolidations
Borrowing over a long period of time
Benefits and drawbacks of a Credit Cards
Can come with rewards
Convenient option if you need a constant cash flow
Balance transfer for debt consolidation
Interest-free grace period
Usually carry higher interest rates
Only requires a minimum repayment each statement period, which means your debt can accrue interest indefinitely
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.