Personal Loans vs. Credit Cards: Which Option Fits Your Needs?
There are different ways to borrow money from a bank. The most popular ones are to apply for a loan or credit card. People who use banking services infrequently will not always be able to answer the question: “Which is better to take - a personal loan or a credit card?” It all depends on the circumstances and the situation in which the loan is issued.
What is a Personal Loan?
A personal loan is a cash loan, which is most often non-targeted. The borrower receives money from the bank as a loan and spends it on personal purposes. If the loan is targeted, it is provided for the purchase of a specific product or service.
The money is issued at an interest rate specified in the agreement. They range from 5.99% to 35.99% (the worse the credit history, the higher the interest rate), and the repayment period is 2 to 60 months. A debt repayment schedule is formed when concluding a transaction: the borrower deposits the same amount into the account every month, gradually returning the money to the bank.
Different Types of Personal Loans
Personal loans come in various forms, and the right choice depends on your needs, budget, and credit history:
Unsecured Personal Loans
Unsecured personal loans don't require you to offer assets as collateral. Lenders decide terms based on your credit score, income, and financial background. Loan amounts range from $1,000 to $50,000, with 1 to 7 years repayment periods and interest rates typically between 5,99% and 35,99%. These loans are good for those with strong credit, urgent expenses, or no desire to risk personal property.
Secured Personal Loans
Secured personal loans require collateral, such as property or valuables, which helps lenders offer more favorable terms. Loan amounts typically range from $5,000 to $100,000, with 1 to 7 years of repayment periods. Interest rates range from 6% to 36%, depending on the value of the collateral and the borrower's credit. These loans are a good option for people with assets to pledge, as they can secure better rates and larger loans, and may be helpful for those with lower credit scores.
Fixed-Rate Loans
Fixed-rate loans offer consistent interest and monthly payments. Loan amounts range from $1,000 to $100,000, with terms from 1 to 10 years. Interest rates are usually between 5% and 30%. It is ideal for those seeking predictable payments over a longer period.
Variable-Rate Loans
Variable-rate loans have interest rates that can change over time, which means your monthly payments may go up or down. Loan amounts usually range from $1,000 to $100,000, with 1 to 10 years terms. Rates start at 4% but can rise. This option is ideal for those who plan to repay the loan quickly or think rates will decrease.
Cosigned and Joint Loans
These loans require a third party, either a cosigner or co-borrower. A cosigner ensures repayment if the borrower defaults, while a co-borrower shares responsibility. Loan amounts range from $1,000 to $100,000, with terms from 1 to 7 years and interest rates between 5% and 36%. These loans suit those with poor credit or needing larger sums.
Buy Now, Pay Later (BNPL) Loans
With Buy Now, Pay Later (BNPL) options, shoppers can split their purchases into smaller payments, usually paid every two weeks. This payment method is often available at checkout and typically covers between $50 and $1,000. After a small upfront payment, the remaining cost is divided into interest-free installments, paid over weeks or months. Interest rates range from 0% to 30%. BNPL loans are great for those who need quick, short-term financing for purchases without long commitments.
When to Use Personal Loans?
Personal loans can be used to pool debts or cover large expenses. If you have high-interest loans, such as credit card debt or short-term loans, they can be repaid with a personal loan with a better rate. Also, such loans are suitable if you must make a large purchase without saving for a long time.
What is a Credit Card?
A credit card is a completely different product (interest rates range from 15% to 22%) created by banks mainly for non-cash payments, such as goods and services. The number and amount of purchases are limited only by the credit limit, which the bank sets individually for each card.
Some credit cards offer an interest-free period lasting from 6 to 18 months. If you manage to pay off the debt on the card during this period, you will not have to pay for using the credit money. The credit limit can be used unlimited times, more precisely, as long as the card is active. And at the end of the validity period, it can be reissued and used further.
There are also secured credit cards, designed for people with no credit or bad credit, and require a security deposit. The annual percentage rate may be higher than average, reflecting the higher risk.
It is also worth noting that it makes sense to use the card. You pay for purchases with it. It does not matter where - on the Internet or in a store with a payment terminal. If you need cash, then a credit card is not the best choice. Withdrawing cash from it against the credit limit is an expensive pleasure (from 24% to 36% per annum). Interest begins accruing immediately. In addition, there may be a fee for cash withdrawals, often a fixed amount (from $5 to $10) or up to 5% of the amount withdrawn).
When to Use a Credit Card?
If you repay the debt on time, no interest is charged, and you can take full advantage of your credit card. This is a great way to make regular purchases. In addition, if you are offered a 0% rate for a certain period, cards can be a good choice for debt consolidation or large purchases. Although cards may not be the best option for large expenses, they may be more convenient than a personal loan if you do not have the highest credit history.
Which Is Easier To Take - a Personal Loan or a Credit Card?
To apply for a loan, the bank must provide many documents: an identity card, a social security number, proof of employment in one place for at least 6 months, a certificate of income for the last 6-12 months, and much more. In addition, the bank will check the credit history before making a decision. Therefore, before applying, it makes sense to request your credit report from one of the three major credit bureaus to understand what conditions you can expect.
The more money the client expects to receive, the longer the list of documents will be and the more difficult the registration process will be. In addition, different types of loans have their nuances. For example, you must also conclude a property insurance contract when applying for a secured loan.
With a credit card, everything is much easier. Usually, an identity card and a social security number are enough to get it, and the process of agreeing on a credit limit does not exceed one hour. This is if the customer has no problems with their credit history. If it is damaged, it will be difficult to get both a credit card and a personal loan.
Personal Loan and Credit Card: Advantages and Disadvantages
Knowing the pros and cons of personal loans and credit cards will help you make an informed decision before using them:
| Personal Loan | |
| Pros | Cons |
| Money can be spent on various needs, such as debt consolidation, home or car repairs, medical expenses, or large purchases. | Some loans may have processing fees and penalties for early repayment. You should check with the lender in advance about all possible additional costs. |
| Personal loans usually offer lower interest rates than credit cards, except for cards with 0% for the first year. The rate depends on your credit rating. | People with low credit ratings may face high interest rates and even rejection. |
| Making payments on time improves your credit score. | With secured loans, there is a risk of losing property if payments are not made. |
| The availability of collateral, a co-borrower, and a guarantor increases the chances of obtaining a larger loan amount and more favorable interest rates and terms. | Non-payment of debts or their delay will damage your credit reputation. |
| Unlike credit cards, personal loans do not allow you to borrow money regularly. You always know when you will pay in full with regular payments. | Personal loans often require large monthly payments because they have a fixed term, for example, 36 months. This can create difficulties for people on a tight budget. |
| They usually have fixed rates and a set payment over a specified period. | Lenders require a high credit score and a stable income to qualify. |
| You can get a large sum - up to $100,000. | Unsecured loans are usually provided for a smaller amount than secured ones. |
| Credit Card | |
| Pros | Cons |
| Renewable limit — funds can be used repeatedly. | A small limit. |
| If the borrower is positive and active, the bank will offer to increase the limit. | Some banks charge a fee for annual/monthly card maintenance. |
| Some cards have an interest-free period. No interest is accrued if the debt is repaid in full within its limits. | There is no repayment schedule, which often leads to endless debt that does not close in any way. Especially if the borrower makes only minimal payments. |
| Availability of loyalty programs. Banks often connect cashback and bonuses to credit cards. | A higher rate, plus banks, often seriously increase the interest on credit cards for cashing out and transfers. |
| Unlimited use. If the credit card expires, the borrower can simply reissue it. | Late payments or exceeding the recommended level of use of the credit limit (no more than 30%) may adversely affect your credit history. |
| It is easier to get a credit card than a personal loan. | Missed/overdue payments can result in significant fines and an increase in the annual interest rate. |
| Great for everyday purchases or large expenses. | Withdrawing cash from a credit card is usually accompanied by an additional fee. |
| It can be a great way to improve your credit score. | Easy access to credit money can lead to private loans, increased debt, and difficulty exiting the debt cycle. |
Personal Loan or Credit Card: How to Choose?
To choose the appropriate option, it is worth considering the following points:
- It is more convenient to repay small amounts using a credit card.
- For long-term payments, a personal loan is usually more profitable.
- A good credit history makes it possible to get a low rate or take advantage of a preferential credit card offer.
- Additional fees accompany cash withdrawal from the card.
- A credit card is suitable for those who can control their spending and avoid overspending.
- If you have other debts, it is better to choose fixed monthly payments.
- Interest rates and the total cost of a loan determine its benefits.
- Early repayment of a personal loan may be associated with additional penalties.
- For the convenience of financial management, you should choose the option that suits your habits.
- Timely repayment of debt is important to prevent the growth of overpayments.
- Additional costs, such as account maintenance or fees, affect the total cost of the loan.
- A credit card is beneficial for small loans and short-term needs.
- A personal loan provides predictable payments for a long time.
Conclusion
It depends on the situation whether you choose a credit card or a cash loan. The most important thing is not to rush. Analyze both products and decide which is more optimal for solving the task.