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Personal loans and credit cards are both ways of accessing credit. But one can sometimes find himself at a crossroad not knowing which option to choose. At that point, the question that may likely come into your mind is to ask; “Between personal loans and credit cards, which is better?” Before I attempt to answer the question, it is important to ascertain that you understand what personal loans and credit cards mean and how they differ.

Personal Loans and Credit Cards Compared

Personal loans involve borrowing a certain fixed amount at a fixed interest rate for a specific fixed number of years. The duration of the loan can range between two and five years. The interest rate you will be charged largely depend on the source of the loan and your credit rating. You can get personal loans from a bank, credit union and online lenders. If you have good or excellent credit, there is tendency for you to be offered lower interest rates as you have opportunity to shop around. A personal loan can be secured or unsecured. Secured personal loan means that borrower will need to pledge a collateral like a car of certificate of deposits. Lenders will not be willing to grant you a loan that is higher than the value of your collateral. For unsecured loan, you don’t need to pledge any collateral but you will be expected to have good credit rating. Alternatively, you can ask a relative with a good credit to cosign the loan for you. This will make you qualify for lower interest rate.

Credit cards, on the other hand, give you access to a line of credit from which you can borrow money up to a predetermined amount known as credit limit. Your credit limit is the maximum amount you can spend with your credit card. Credit card companies take several factors into consideration to determine your credit limit. Such factors include your income, credit history, debt-to-income ratio, limits on other credit cards and the type of credit card involved among others. Once you have reached your credit limit, you will need to pay down the card balance before you can use the card for another purchase. You may not necessarily pay the entire card balance at the end of the month. However, you will need to pay interest on any unpaid balance on the card at the end of the month. But if you are able to pay off the entire card balance at the end of the month, you will not be charged any interest.

So, let’s get back to our question. Between personal loans and credit cards, which is better? When it comes to personal finance questions, there may not be a ‘one-size-fits-all’ kind of answer that can apply to everybody. The reason is that, your financial situation may not be same with the other fellows. What is good for goose may not be good for gander in this context. Therefore, instead of saying that personal loans are better than credit cards or credit cards are better than personal loans, it is better to answer the question with some analysis.

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When Personal Loans Can Be Better

There are instances when personal loans could be preferred above credit cards. Some of these instances include the following:

• Fixed amount is required: If you know with certainty the amount you will need to carry out the transactions you have in mind and the money is quite substantial, it may be better to go for personal loans. The interest rates on personal loans are usually cheaper than credit card interest rates. Also, with personal loans, you will be able to extend the repayment over a long period of time without having to pay high interest through your nose. The interest rate on personal loan is fixed throughout the duration the loan covers.
• Fixed repayment amount: If you obtain a personal loan, you will be required to pay fixed amount every month until the entire loan is liquidated. If you know you can be committed to making the monthly payment without fail, this can be a better option for you. Monthly fixed repayment amount helps you in planning and budgeting. You know how much you are going to pay at the end of the month.
• Large purchase: If you need fund to make large purchase or carry out home improvement, you may not be able to do this with credit card. Your credit limit may not be able to accommodate the purchase. Even if you have enough credit limit that can accommodate the purchase, the interest you are going to pay on your card balance will be too high especially if you don’t have access to 0% introductory offer.
• Excellent Credit Score: If you have a very good or excellent credit, you can take advantage of this to get personal loan at a very good interest rate. Lenders use credit score to gauge borrowers’ creditworthiness. That is, if your credit is excellent, it is a sign that you are credit worthy and that you will pay back the loan if granted. This can make them offer you a lower interest rate. People with poor credit may not be able to get personal loan. If any lender is going to grant them the loan at all, it may be at a very high interest rate. Otherwise, they may be asked to provide collateral.
• Debt consolidation: Personal loans are good for people having loans of very high interest rates and they want to consolidate the loans into one loan at a lower interest rate. You may ask, “Why not consolidating into credit card?” If it will take you a long time to pay off the new loan, it will be better to opt for a personal loan. Nevertheless, what seems to be a benefit can turn out to become a drawback. If you have enough money to quickly pay off the entire personal loan balance, you may not be able to do so without being charged early repayment penalty.

Read Also: How to Get Instant Payday Loans with No Credit Check

When Credit Cards Can Be a Better Option

With all the benefits attached to personal loans as discussed above, credit cards can be a better option in some situations too. These situations may make credit cards to be more appealing than personal loans:

• Regular spending involving small amount: You may not need a large amount as a loan at a time. What you need may just be a line of credit that will allow you to spend little amount immediately. Unlike personal loans whereby you pay interest on the entire loan amount, you will only be charged interest on any unpaid balance on your credit card. With credit card, you can easily buy things in grocery stores as long as you have not exhausted your credit limit.
• No specific loan amount: If you don’t know the actual amount you will need, you may want to opt for a credit card. Applying for personal loan that you don’t actually need will amount to paying interest on loan that you don’t actually enjoy. Also, applying for an amount that is not enough may defeat the purpose for which you applied for a personal loan. In this situation, having access to a line of credit will be more appropriate.
• 0% Promotional offer: If you can get a credit card that offer you 0% apr promotional offer for a considerable length of time, you can take the advantage of the card offer to make bulk purchase and quickly pay off the card balance before the 0% apr promotional offer period expires. If you are unable to pay off the card balance before the end of the 0% apr promotional offer is over, the interest you are going to pay on the card balance may be higher than the interest you might have saved on the personal loan.
• Flexibility in repayment: If you are not certain of being able to pay regular fixed amount on personal loans, credit cards offer more flexibility in term of repayment. You are only required that you make minimum payment on your card balance at the end of the month. Minimum payment is usually around two per cent of the card balance.
• Use for foreign transactions: If you travel for vacation, you can easily use credit card to pay for foreign transactions. But your credit card provider may likely charge you foreign transactions fee. There are certain travel credit cards that don’t charge foreign transactions fee. But you may likely pay annual fee on the card. If you want to go for such card, you should ensure that the savings you will be making on the foreign transactions fee outweigh the annual fee you will pay.
• Rewards and other perks: There are reward credit cards that can help you earn rewards such as cashbacks, travel points and other perks. Before you sign up for a reward card, you should ask about the available rewards and find out whether certain restrictions apply.
• Debt consolidation: It is not only personal loans that you can use for debt consolidation. You can use credit card as well especially when you can afford to pay off the loan within a short time. Balance transfer credit card with 0% apr introductory rate will be a good choice

Read Also: Premium Credit Cards: Pros and Cons

Credit cards have their disadvantages as well. If you are the type that buys things at impulse, carrying credit cards may lead to overspending. This can pull you into debts which you may not easily recover from. If you can’t control your spending, you may choose not to carry your card with you except when you want to use it for specific purpose(s).

Using your credit card to withdraw cash will amount to cash advance. This will attract cash advance fee. Besides, you will need to pay interest on the amount withdrawn. The interest rate on cash advance may be higher than the regular interest rate on your card. The interest start counting from the date you make the withdrawal.

Credit Cards, Loans