Credit Card vs Personal Loans

Joe Schwartz

Joe Schwartz

Personal Loans Editor |

Compare credit cards to personal loans and the pros and cons of both.

Credit card or personal loan? That choice all depends on what you buy and when you plan to pay back the money.

When you need to borrow money, you may want to consider different financing options. Not sure when to use your credit card or apply for a personal loan? Get all you need to know so you can make smart financial decisions before your next purchase.

A look at the numbers:

Average Interest Rate:

• Credit card: 13.99% to 22.99%

• Personal loans: 2.99%-35.99%

Borrowing Limit:

• Credit card: Monthly

• Personal loans: Monthly

Repayment Terms:

• Credit card: Up to $50,000

• Personal loans: Up to $100,000

When should I use a credit card?

For smaller, monthly expenses that can be paid off before the next monthly billing period

Making a purchase with a credit card makes sense when you plan to pay off the amount before the next payment due date. Compared to other options, credit cards stand out as one of the most expensive forms of financing. They tend to charge high monthly interest rates in the double digits. If you don’t pay your bills on time, the amount you owe could pile up easily.

Credit cards typically have a monthly payment period. Each month, the credit card company will only require customers to make a minimum monthly payment, usually around 1 % to 3% of the credit card balance. However, even if you pay the minimum amount, the remaining balance will still accrue interest.

If you have leftover debt at the end of the month, the card will charge an interest rate. Credit cards calculate interest based on the average daily balance, not the ending balance. To avoid piling up interest, you’ll want to pay off the full balance before the monthly billing period ends.

In that case, you should use a credit card for short-term purchases. Turn to a credit card only when you can pay off the amount before the next card payment period. In this way, you won’t wind up paying high interest rates. Because credit cards have such high interest rates, they make sense for smaller monthly purchases that users can pay for before the next monthly billing period ends.

When should I use a personal loan?

Best for long-term financing on personal expenses

When you don’t think you can manage to pay for expenses within one month then you might want to consider a personal loan instead of using a credit card. Personal loans often have lower interest rates than credit cards, especially if you have good credit.

Credit card monthly interest rates can change depending on the average daily balance. With personal loans, borrowers secure a certain amount of money in a lump sum and make fixed payments over a specific period. Fixed payments include principal and interest. You may also have to pay for application, origination, monthly or prepayment fees, depending on the lending service.

Personal loans can cover large expenses for up to $100,000. You can use a personal loan for a range of purposes, whether looking to make home improvements, finance a wedding, consolidate credit card debt, or pay for medical procedures.

Bottom Line: Credit Cards vs. Personal Loans

Because of the high monthly interest rates, credit cards make sense for smaller purchases when you can pay off the amount within the monthly payment period.

If you can’t pay off the debt within a month and have good credit, a personal loan gives a better financing option for securing funds up to $100,000 with long-term repayment and lower monthly interest rates.

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