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Personal Loan Vs. Credit Card

7-Minute ReadFebruary 22, 2022

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When it comes to deciding between using a personal loan or a credit card to cover an emergency or one-time expense, there can be a lot to consider.

This article will point out the best times to use either loan and how they differ in interest rates. We’ll also  suggest some alternative loan options.

Using A Loan Vs. A Credit Card

Both personal loans and credit cards allow you to borrow a predetermined amount of money that you pay off over time. The main differences boil down to repayment plans and how you borrow the cash.

A personal loan typically offers you a fixed amount that you receive in a lump sum when your application gets approved. You pay back the loan in monthly installments for the agreed-upon term – it's typically the same amount each month because you're offered a fixed interest rate. Lenders consider your account closed once you pay off your loan, and you'll need to submit another application if you want to borrow more money.

Lenders consider a credit card revolving debt – you get a line of credit that allows you to borrow money up to a certain limit as often as you want. You can pay the entirety of the balance each billing cycle or carry a balance and pay interest. As long as the amount you want to borrow is under your credit limit, you can keep using your card for an indefinite period of time.

Both personal loans and credit cards can result in unsecured or secured debt. When you take out an unsecured loan, it means that the creditor qualifies you based on your creditworthiness, or ability to pay back the loan on time. Secured debt, on the other hand, means you need to back your loan with collateral – like a car or money down – so that lenders can minimize some of the risk associated with loaning you money. Depending on your type of personal loan, you may or may not require collateral to secure the loan, but personal loans are typically unsecured.

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When To Use A Personal Loan Or Credit Card

There’s no definitive answer as to whether a personal loan or credit card works better for you or your situation. However, there are certain circumstances by which it makes sense to choose a personal loan over a credit card and vice versa. Let's break down what both options bring to the table.

When To Use A Personal Loan

Personal loans are best for those who:

  • Have many high-interest loans and want to consolidate their debt
  • Require cash for a large, one-time expense
  • Have a decent credit score
  • Have the ability to keep up with fixed, monthly payments

Borrowers with good to excellent credit tend to qualify for better rates, particularly if they have a credit score between 600 – 700. Apart from a good credit score, lenders also look at your debt-to-income (DTI) ratio to determine your ability to pay back another loan.

Getting a personal loan is a generally straightforward process if you know how much cash you need, qualify for good rates and choose the right lender. Once approved, you can generally expect to receive your funds in 1 – 7 business days.

Rocket Loans℠ can offer borrowers same-day financing for their personal loans, so you may see your money the same day you’re approved.*

When To Use A Credit Card

Credit cards are best for those who:

  • Need financing for smaller, everyday expenses
  • Can pay off their full balance every month
  • Qualify for promotional offers
  • Are interested in earning rewards like cash back or points toward travel

With a credit card, you generally can't borrow as much as you can with a personal loan, and you may not end up using your credit card in all instances to finance purchases. Credit cards can be a more flexible payment option, though, since you can pay the minimum or the entire balance at the end of each billing cycle. It’s recommended, though, that you pay as much of your balance as you can, as you could find yourself paying much higher interest rates if you choose to carry over balances month to month. Those with excellent credit can qualify for rewards credit cards or cards that offer a 0% introductory annual percentage rate (APR) – allowing them to pay down their debt interest-free as long as they do so within the card's specified period, typically 12 – 18 months.

Credit Card Vs. Personal Loan Interest

Where personal loans and credit cards can really differ is their interest rates. By the end of 2021, the average interest rate was above 16%. For a personal loan, the average interest rate can hover between 6% – 36%, depending on a borrower’s credit score, borrowing history and current income.

Rocket Loans offers fixed-rate personal loans, meaning that your rate is locked in and won’t change for the life of the loan.

Personal Loan Vs. Credit Card: Debt Consolidation

Both personal loans and credit cards can be used to consolidate credit card debt, so you can get out of debt faster by saving money on interest.

Personal loans are a better idea if you have a lot of debt to pay off that's more than what you can put on a credit card, especially if you need more than a year to pay it off. You can take out a debt consolidation loan with more affordable fixed monthly payments, and possibly with a lower rate than what you're paying on a card.

It can make sense to use another credit card to pay off your existing balance if you can qualify for a 0% APR offer, known as a balance transfer. Let’s say you have $5,000 on an existing card charging 20% APR. You decide to open a credit card with a 0% APR for the first 12 months and transfer your $5,000 balance to this new card. This means you don't have to pay interest on your existing balance for the next 12 months instead of paying 20% with your credit card.

Keep in mind that conducting a balance transfer can subject you to fees, so you should see if it's worth paying those before making the jump. You'll also want to have a plan to pay your balance in its entirety before the introductory period is over, or you'll be paying interest again.

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Is A Personal Loan Better Than Credit Card Debt?

Having both a personal loan and credit card can affect your credit score in positive and negative ways. When credit bureaus look at your score, they look to see how well you balance all of your debt, especially revolving and installment debt. Having a variety of debt, or a diverse credit mix, including personal loans and credit cards, can help to raise your credit score.

Of course, this all depends on how well you keep up with your monthly payments for each. For example, having credit card debt can raise your credit utilization ratio, which can lower your score. A default on a personal loan can also significantly lower your score and creditworthiness in the eyes of lenders. 

Pros And Cons Of Personal Loans And Credit Cards

Personal loans and credit cards both have their own benefits and drawbacks, all of which should be taken into consideration before making a commitment.

Personal Loans

Pros:

  • Personal loans typically have lower interest rates than credit cards.
  • Most loans come with fixed monthly payments.
  • Lenders can generally offer fast funding, sometimes the same day as approval.

Cons:

  • A low credit score can mean higher interest rates for borrowers.
  • Borrowers would need to reapply for a loan if they need more cash.
  • Secured loans may require collateral.

Credit Cards

Pros:

  • Credit cards offer revolving credit and potential increases to your credit limit.
  • Cardholders don’t have to repay their full balance every month.
  • Some cards offer cash back and other rewards.

Cons:

  • Credit cards typically have high interest rates.
  • Some cards require borrowers to pay annual fees.
  • Irresponsible credit card use can put you in credit card debt.

Alternatives To Personal Loans And Credit Cards

If neither will work for you for any reason, a personal loan and credit card aren’t your only options. Consider some of these loan alternatives:

  • Home equity loan: With a home equity loan, you borrow a lump sum of cash against the equity you’ve built into your home. The loan is secured by your home, though, and a default could result in your home being foreclosed.
  • Home equity line of credit: Similar to a home equity loan, a home equity line of credit (HELOC) instead functions like a credit card in that you have a certain credit limit you can borrow against. Your home is also used to secure this type of loan.
  • Cash-out refinance: A cash-out refinance allows you to refinance your mortgage and convert your home’s equity into a lump sum of cash to use as you wish. A bonus to this method is that you can get yourself a lower mortgage rate in the process.

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Final Thoughts

Whether you go with a personal loan or credit card for your financial needs will depend on your situation, and what kind of purchase you’re looking to make. Both can be good for different uses, and can offer differing interest rates, but the decision in the end is up to the individual.

If a personal loan sounds like the better option, you can get started today with Rocket Loans and see what rates you prequalify for.

*Same day funding is available for clients completing the loan process and signing the Promissory Note by 1:00 p.m. ET on a business day. Also note, the ACH credit will be submitted to your bank the same business day. This may result in same day funding, but results may vary, and your bank may have rules that limit our ability to credit your account. We are not responsible for delays that may occur due to an incorrect routing number, an incorrect account number or errors of your financial institution.

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