You need quick money for an emergency expense or a new purchase, but you’re unsure which option to choose. This article will help you understand the differences, advantages, and disadvantages between personal loans and credit cards, helping you to make better decisions regardless of your credit.
Understanding Personal Loans and Credit Cards
What is a Personal Loan?
A personal loan is an unsecured installment loan typically ranging from $100 to $35,000. Borrowers get the money in a lump sum and repay it in fixed monthly payments over a set term, usually one to five years. Interest rates vary based on income, credit, state of residence, and lender guidelines.
Related Terms To Personal Loans:
- Unsecured loans:
- Loans that don’t require collateral are considered unsecured loans. Unlike a mortgage or home loan, you don’t have to put up collateral to guarantee the loan. The loans are granted based on your credit and ability to repay the loan.
- Installment loans:
- Any loan repaid in fixed payments over a set period is an installment loan. Car loans, home loans, and personal loans are different forms of installment loans. You borrow a lump sum and pay it back in regular installments, usually monthly, over the loan term.
- APR rates:
- APR or Annual Percentage Rate. It’s the total annual cost of a loan, including interest and fees. When comparing loans, look at the APR, not just the interest rate.
What is a Credit Card?
Credit cards offer a revolving line of credit, allowing you to spend (borrow) up to a specific limit. Borrowers can make minimum monthly payments and pay interest on outstanding balances. Many cards offer promotional 0% interest periods, making them appealing for short-term financing.
Related Terms To Credit Cards:
- Revolving Credit:
- Revolving credit allows you to withdraw or use any amount up to your assigned credit limit. As you repay the borrowed amount (outstanding balance) the credit becomes available to use again. A major benefit is that you only pay interest on the amount used, not the entire credit limit.
- This flexibility makes revolving credit great for ongoing expenses and building credit history.
- Introductory APR
- Many credit card issuers offer an introductory Annual Percentage Rate (APR) to attract new customers. Typically a low or 0% interest rate for a limited time (usually 6-18 months).
- Introductory special offers can be a powerful tool for financing large purchases or consolidating debt. It’s always important to have a repayment plan before the regular rate begins to be charged.
- Introductory or promotional rates can apply to purchases, balance transfers, or both.
- Introductory offers can save you money on interest if used wisely. Beware of transfer fees if transferring debt from one card to another.
- Regular APR
- The rate you’ll be paying after the intro period ends. A much higher interest rate than the initial introductory offer.
- Credit Utilization Ratio
- Your credit utilization ratio is the percentage of your available credit that you’ve used. It’s calculated by dividing your total outstanding balance by the total credit available. It’s a key factor in your credit score calculation.
- Lower ratios (under 30%) are generally better for your credit score.
- High utilization can signal financial stress to lenders.
- Keeping balances low can help improve your credit over time.
- Your credit utilization ratio is the percentage of your available credit that you’ve used. It’s calculated by dividing your total outstanding balance by the total credit available. It’s a key factor in your credit score calculation.
The monthly cost of a $5,000 personal loan depends on the interest rate and loan term. For example:
3-year term at 10% APR: $161.34 per month.
5-year term at 15% APR: $118.95 per month.
Use our Personal Loan Calculator to find precise calculations based on your terms.
Missing a payment can lower your credit score by several points, especially if it’s over 30 days late and reported to credit bureaus.
Yes, debt management programs through credit counseling agencies can help negotiate lower interest rates and consolidate payments.
Paying only the minimum prolongs debt repayment and increases the total interest paid over time. Aim to pay more than the minimum whenever possible.
Some issuers may waive late fees or penalties if it’s a first-time occurrence and you contact them promptly. Policies vary by issuer.
Minimum payments are typically calculated as a percentage of your outstanding balance (e.g., 1-3%) or a flat amount, depending on the issuer. They may also include interest charges and fees.
Yes, some lenders or card issuers may lower rates if you have a strong credit history or improved financial standing.
Comparison Chart: Personal Loans vs. Credit Cards
Below is a general side-by-side comparison to help you understand key differences:
| Feature | Personal Loans | Credit Cards |
|---|---|---|
| Interest Rates | 6.99% – 35.99% | 13.99% – 24.99% (avg) |
| Loan Amount/Credit Limit | $100 – $35,000 | $500 – $20,000 (typ.) |
| Repayment Term | Fixed (1-7 years) | Revolving |
| Collateral Required | No (unsecured) | No (unsecured) |
| Impact on Credit Score | Hard inquiry | Utilization affects score |
| Fees | Origination fees (0-10%) | Annual fees, balance transfer fees |
| Approval Speed | Same day to a few days | Instant to a few days |
| Best For | Large, one-time expenses | Ongoing expenses, rewards |
Personal Loans vs Credit Cards
Pros and Cons Compared
Pros and Cons of Personal Loans
Pros:
- Flexibility in use
- Fixed interest rates
- Potentially lower rates than credit cards
- No collateral required
- Quick funding
Cons:
- Interest rates can be high
- Potential fees
- Credit requirements for lower interest rate loans
- Increased debt burden if you over borrow
Pros and Cons of Credit Cards
Pros:
- Rewards programs (cashback, travel points)
- Short-term financing with 0% APR offers
- Easy to use for everyday expenses
- Builds credit history
- No fixed repayment schedule
Cons:
- High interest rates on unpaid balances
- Temptation to overspend
- Credit utilization impacts the credit score
- High fees for balance transfers and cash advances
How People Use Personal Loans and Credit Cards
An Example of A Wisely Used Personal Loan
John, a small business owner with a 580 credit score, needed $4,000 for urgent equipment repairs and didn’t have 3 business bank statements required for a business loan. Despite his bad credit, he secured a personal loan at 22% APR in a few days. The fixed monthly payments fit his budget, allowing him to repair the equipment essential to his business operations quickly.
A Credit Card Use That Was Rewarding
Sarah used her rewards credit card for all daily expenses, earning enough points for a free flight to her dream vacation destination. She paid her balance in full each month to avoid interest charges. Basically, she financed her purchases for 30 days at no cost and got a free ticket for using her reward credit card.
Quick Approvals For Personal Loans vs. Online Credit Cards
The Approval Process For Personal Loans
Step-by-Step Guide To Getting A Personal Loan
- Find a reputable website that’s been around for years
- Check initial eligibility online
- Complete online form
- Authorize credit inquiry
- Wait for the lender’s response
- Submit proof of income (if necessary)
- Provide identification documents
- Review loan offer
- Understand repayment schedule
- Accept or decline the offer
- Receive funding, deposited directly into your bank account
- Typically 1-3 business days
Step-by-Step Guide To Getting Online Credit Cards
- Find a card reward program you like
- Compare credit card offers
- Select a card matching your credit profile
- Complete application form
- Authorize credit check
- Card mailed within 7-10 business days if approved
- Set up an online account and auto-pay
Key Differences Between Credit Cards and Personal Loans
- Personal loans: Can require more documentation
- Credit cards: Faster approval process
- Personal loans: Lump sum funding in one shot
- Credit cards: Revolving credit line
Why Was Your Loan Application Denied?
Common reasons for personal loan application denials include:
- Low credit score.
- Insufficient income.
- High debt-to-income ratio.
- Limited credit history.
- Recent negative credit events.
How to Avoid Scams When Applying for Personal Loans
- Verify lender licenses.
- Read reviews from trusted sources.
- Avoid upfront fees.
- Carefully review the fine print.
Final Thoughts
Understanding the differences between personal loans and credit cards, especially if you’re dealing with bad credit, can help you make smarter financial decisions. Use tools like our Personal Loan Calculator to evaluate your options and plan effectively. Remember, responsible borrowing is key to maintaining financial health.
Looking for more information on consumer loans, including personal loans, installment loans, credit cards, and payday loans? Check out these trusted resources:
- The Pew Charitable Trusts: Pew Charitable Trusts provides valuable insights and guidance for borrowers.
- Federal Trade Commission’s Consumer Information page: Learn about your rights and make informed financial decisions at the FTC’s Consumer Information page Federal Trade Commission Consumer Information.