When you need to borrow money, there’s usually that struggle of choice: personal loans vs. credit cards. However, selecting between them simply depends on your needs.
Personal loans are much better if you need to borrow a large amount and you have good credit. On the other hand, people who have poor credit or need a small loan may prefer a credit card.
Table of Contents
When to Get Personal Loans
For borrowing sizable amounts, personal loans are the superior choice. Qualified borrowers can expect a hefty $100,000 limit, depending on the lender’s discretion. These are installment loans that give a lump sum repayable through monthly payments. Moreover, those with good credit scores are likely to qualify for the lowest rates.
These typically have 6% to 36% interest rates, and having good credit may earn you the lower end of that range. In fact, personal loans are mostly great if you have good credit, as lenders may loosen repayment terms and interest charges. After all, they scrutinize the credit ratings of their borrowers to verify their likelihood of repayment.
In contrast, you may find personal loans troublesome if you have poor credit. A bad FICO score or other credit ratings may mean stricter loan terms and lower limits. However, a personal credit builder loan may help you improve your rating. Later, we will discuss how personal loans can help reduce your debts.
Nevertheless, between personal loans vs. credit cards, the former is suitable for large expenses. For instance, it is a great way to fund a large-scale home renovation project. You may choose personal loans over business loans due to lesser restrictions. Regardless, remember to have money for origination fees that loans and credit cards usually charge.
When to Use Credit Cards
On the other side of the spectrum, we have the trusty credit card. Of course, you probably use it along with millions of people worldwide as a staple for daily expenses. Just whip it out, let it slide on the reader, and you’re set. After all, it would be unthinkable to take out a personal loan for groceries every time.
That’s why the credit card is better for smaller, day-to-day spending. These usually have high-interest rates that will accrue a mountainous amount of interest from a huge principal. Moreover, the card may have credit limits that may prevent you from piling an enormous credit card balance.
In fact, some credit cards offer an introductory period with 0% interest. Some even use this for a debt reduction strategy called a balance transfer. Depending on a borrower’s credit rating, a lender may be inclined to give cards with waived annual fees. Card applications are expedient too, as you may receive it on the same business day.
Between personal loans vs. credit cards, the latter has larger interest rates. You may get double-digit rates, so make sure to pay balances on time. Letting them pile up may increase your credit utilization, deducting points from your credit rating. Regardless of your choice, diligent payments are always a must.
Personal Loans vs Credit Cards for Debt Consolidation
As we’ve mentioned, personal loans and credit cards may help reduce your debts. One of the strategies that may help is debt consolidation. It is a loan that pays the total of your debts, and you must pay that lump sum back with lower interest. It facilitates debt payoff because it simplifies debt management by replacing multiple balances with just one.
As a general rule of thumb, personal loans are best for debts exceeding $15,000. Your unpaid balances may have grown to such tremendous volumes, and consolidating them with a personal loan may greatly aid you. However, you should thoroughly assess all your lending options. Make sure a lender can give better terms than those from your existing debts.
On the other hand, a credit card may be preferable for debts below $15,000. Card limits usually range around that amount, more or less. What’s more, it may have an intro period with a 0% annual percentage rate, enabling you to repay debts with no monthly interest. Again, maintain diligent payments to avoid accruing huge interest.
Nevertheless, it’s unwise to focus solely on choosing between personal loans vs. credit cards. Search for every possible option available, and check which one may truly help you. There are other debt reduction strategies you may perform such as debt settlement and credit counseling. It provides partial debt relief especially for people with poor credit scores.
Credit counseling is also another viable alternative for fixing your financial situation. These are provided by companies that will guide you in repaying debt while extending your time for payment. If your credit status is truly dire, you may ask a friend or relative with better credit to co-sign for you. They can help you avail of better loans or credit card terms.
The Bottomline: Which is Better?
As we’ve said, the winner between personal loans vs. credit cards all depends on your needs. For borrowing large sums of money, you’ll need a personal loan. Use these to renovate your home, start your business, or fund other expensive projects. In contrast, a credit card is more suitable for daily expenses and bill payments.
In addition, both can help reduce your debts, depending on their scale. If you have debts that exceed $15,000, a personal loan can help you consolidate them with lower interest. Debt consolidation loans may provide better terms than those from your existing balances. You may get even better deals with good credit.
If you have bad credit, a balance transfer credit card may be a more viable option. These may provide 0% interest for the introductory period, especially helpful if you have a bad rating. After that duration though, you may receive double-digit interest rates. Make sure to pay diligently during that time, so you can avoid ludicrous interest.