Fixed-Rate Personal Loans vs. Credit Cards

The personal loan vs. credit card debate is one that has many answers depending on your financial needs and the details of your situation. Credit cards may be best when you’re not sure how much money you will need or if you are even going to use the money. On the other hand, personal loans are a good fit when you know exactly how much you need and want to make a major purchase now.

Each option has it’s own merits when it comes to making a borrowing decision. Taking the time to understand the differences between credit cards, personal loans, and even balance transfer cards can help you to make the best financial decision possible.

Personal loan vs. credit card

Personal loans and credit cards are both viable options to help consumers pay for purchases and expenses they don’t currently have the liquid cash for. Deciding which option is best for you depends on quite a few factors.

The most important deciding factor should be how much the money is going to cost you. Annual percentage rate is a great metric that allows you to compare different forms of borrowing on an even playing field. APR is the percentage rate you will pay for the year that includes interest and all fees. In other words, it’s the cost to borrow the money based on a percentage of the amount borrowed.

According to the Bureau of Consumer Financial Protections August 2019 report, the average APR on credit cards in 2018 was between 20.3% and 26.4%. Experian, a national credit reporting bureaus, reports the national average APR for personal loans is 9.41%. What this means is that for the average financial profile, credit cards are significantly more expensive annually than personal loans.

Stephen E. Ingram, a registered representative of International Planning Alliance, drives this point home further by explaining that people with average credit scores could benefit from using a personal loan over a credit card.

“Credit card debt is a downward slippery slope with high, variable rates with very low minimums to trick you into not paying enough and growing the debt,” Ingram says. “Conversely, a personal loan has a set payback date, and typically a much lower rate costing the individual a lot less money.”

There are some more factors to consider, though. When you take out a personal loan, you get one lump sum of money. You’re not able to request more without taking out a brand-new loan. Additionally, whether you use the money or not, you will be charged.

With credit cards, you’re only charged on the money that you use. You’re also able to request limit increases down the road if you need access to more funds. While this may not be wise, it does allow for significantly more financial flexibility. This is especially true when you’re not sure how much money you need to borrow.

Balance transfer vs. personal loan

A third option that may come into play in debt consolidation situations is a balance transfer. A balance transfer is when you apply the balance of a current credit card to a new one with a lower introductory interest rate. Basically, you’re transferring the balance from one debt source to another.

In some situations, this can be an attractive option. The problem, though, is that often there are significant limitations on balance transfers. Additionally, there are usually fees associated with a balance transfer, as well as a limited period of time for the lower interest rate. Balance transfers also involve opening a new credit card, which could affect your credit score.

When to use a personal loan

Ideally, personal loans will be the best option for medium to larger purchases and debt amounts you plan to carry longer than 12 months. Personal loans are also viable options for shorter-term loans, but they could take a back seat to a 0% first-year introductory offer from a credit card. Many personal loan minimums start around $2,500, so smaller amounts might not be a good fit. That being said, some companies offer personal loans for as little as $1,000.

If you can get approved for a personal loan at a competitive rate, that’s going to be your best option most of the time. Personal loans are popularly used for things like home improvement, unaccredited tuition costs, debt consolidation and unplanned emergencies.

When to use a credit card

Credit cards often are more expensive forms of borrowing, but not always. Many credit cards offer introductory promotions like 0% APR for the first 12 months. If you’re looking for a new credit card and are looking to make a purchase you plan on paying off within the first 12 months, this might be a better option. Additionally, cashback promotions need to be factored into the overall cost.

However, if you already have several credit cards, you may do some damage to your credit by opening another account. Additionally, if you are planning on carrying the debt for more than 12 months, you’ll save for a year but end up paying the higher APR after the introductory rate period, which can quickly wipe away previous savings.

It’s critical that when making this decision, you’re honest about when you’re going to pay back the debt. If you’re sure you will pay off the balance in a time frame that helps you save through a credit card, go for it. But if you think you may end up carrying the debt for longer, look into a personal loan instead.

If you’re not sure about how much money you’ll need, a credit card could be a better option. When you are approved for a credit card, you are given a credit line of the amount you are allowed to spend. If you don’t spend any of it, you don’t pay any APR, interest or fees.

With a personal loan, though, you’re required to declare the amount you need upfront, and you will pay regardless of whether you use the money or not. If you’re unsure about how much you need, then wait. You don’t have to get a credit card just because you’re unsure. You can wait until you are sure about the amount you need and then look into your options.

Closing thoughts

All financial situations and needs are unique. No one can ever tell you that personal loans, credit cards, or balance transfers are the right choice for your situation. To make the best decision, you need to settle the personal loan vs. credit card debate as it relates to your personal finances. Figure out how much you need to borrow, what you can be approved for, your plans for repayment and what each option will cost.

Jason Wesley

Contributing Writer

Jason Wesley is a seasoned writer with a passion for writing about banking, tech, personal growth, and personal finance. As a Las Vegas local and area business owner for a decade, he knows the ins and outs of the city better than anyone.