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Personal Loans vs. Credit Cards - A Closer Look

Personal Loans vs. Credit Cards - A Closer Look

By Matt Diehl • March 25, 2016

When it comes to borrowing money, two common options include personal loans and credit cards. The question is – which one is right for you?

Here’s a closer look at three topics to consider when choosing between personal loans and credit cards:

Type of purchase

Personal loans – Personal loans are typically used for larger, long-term purchases that the borrower intends to pay off over time. By taking out a loan, the borrower can keep the cost separate from other debts and credit accounts. Common uses include medical bills, auto repair bills and home improvement.

Credit cards – Credit cards can be ideal for smaller, short-term expenses that can be paid off quickly. The use of a credit card is up to the borrower and might only be limited to the credit limit on the account. Common uses include gasoline, dining out and clothing.  

Availability of funds

Personal loans - The availability of funds may not be immediate, but some lenders can provide a same-day response to an application. If approved, they might also disburse the funds the same day. Most personal loans are paid out in a lump sum and delivered via paper check or direct deposit to a bank account.  

Credit cards – The availability of credit card funds depends on the habits of the borrower. If the borrower has enough open credit to make a purchase, the funds should be immediately available. All they need to do is swipe the card or type in the account information.

Monthly budgeting

Personal loans - Some personal loans have fixed payments throughout the life of the loan. This means that once you sign the loan agreement, your interest rate is locked until the account is paid in full. It may be easier for some people to manage a personal loan payment if they can count on paying the same amount month after month.

Credit cards - While some credit card interest rates are fixed, others can fluctuate due to missed payments, a drop in credit score and variable interest rates.1 If your rate does change, the rising interest costs could increase your monthly payment.2 The minimum payment for credit cards can also fluctuate based on how much you spend on the account.3 If you continue to charge purchases, or suddenly add a large purchase to the account, the minimum payment could get higher and make it harder to budget.4

Decide what’s best for you

Making smart money decisions comes down to knowing your available options. Credit cards can make sense for smaller, short-term purchases, but when it comes to large, long-term purchases, personal loans could be the answer.

1. Konsko, Lindsay. “5 Times Your Credit Card Issuer Can Raise Your Interest Rate.” (accessed December 19, 2017).
2. Konsko, Lindsay. “Why Does My Credit Card Minimum Payment Keep Rising?”. (accessed December 19, 2017).
3. Konsko, Lindsay. “Why Does My Credit Card Minimum Payment Keep Rising?”.
4. Ibid.

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