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If you’re looking for a big ticket item or want to tackle high-yield debt, you might be considering a credit card or a personal loan.
Here’s how to determine when it’s best use a personal loan or credit card:
|If you need a large sum of money
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If you need to borrow a larger amount, you are covered by a personal loan. Credit card limits are usually not as high as personal loan limits, so only use a credit card if you have a smaller expense.
|If you need a fixed monthly payment
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Personal loans have flat rates, so you always know exactly how much to budget for each month. Credit cards, on the other hand, have variable rates that can fluctuate, so your monthly payment can change.
|If you need time to pay it off
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If you need more time to pay off your loan, a personal loan is the best choice. However, if you can pay off the whole amount in a year or less, the smartest idea is to get a 0% balance transfer card and pay it off in full before the promotional period ends. But first, consider the balance transfer fee to make sure it’s worth it.
|If you need to consolidate debt
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Personal loans typically have a lower interest rate than credit cards, so a loan is usually the best option when it comes to debt consolidation.
|When you need money immediately
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While you can get money from some personal loan providers as early as the next business day, it can sometimes take up to 7 days. So if you need money immediately and already have a credit card that you can use, a credit card is your fastest option.
Still need help choosing between a personal loan and a credit card?
When you use a personal loan
If you are trying to make a decision, here are a few reasons to choose a personal loan:
You need to consolidate debt
A debt consolidation loan is a personal loan that you use to pay off high-interest debt such as credit cards, medical bills, and even other loans. With a loan, you make regular, timely monthly payments for the loan until it is paid in full.
High interest debt can derail your finances, so addressing it with a lower personal loan may be a good option.
Find out more: How to Pay Off Credit Card Debts
You are making a major purchase
The more money you need, the better a personal loan is as the interest on personal loans is typically lower compared to credit cards. If you have excellent credit, you can expect to pay between 10.30% and 12.50% in interest. For good credit, it’s about 14.21% to 15.50%.
The better your credit score, the lower your personal interest rate will be. And with a lower rate, you can save money over time.
You want to protect your credit usage
When you get the most out of your credit cards, your credit score can drop because your usage (or credit usage) is very high. Typically, using 30% or more of your credit usage doesn’t look good on your credit report (although sometimes even less than 30% can affect your score). But with a personal loan, your credit use does not take a hitso you can use your entire balance without being penalized.
If you are interested in a loan, it is good to get one online personal loan or a loan from a bank or credit union.
When should you use a credit card?
If you’re trying to decide, here are a few reasons to choose a credit card:
You make a small purchase
If you have a small purchase or can afford to pay off the balance, a credit card may be a better idea.
But you want to make sure you can afford to pay for your credit cards at the end of each payment period. If not, and you carry over a balance to the next month, you could face high interest charges and fees.
You can avoid paying interest
Yes, credit cards have some of the highest interest rates – the average credit card APR is nearly 18% – but you you don’t have to pay interest if you use it wisely. The best way to avoid interest is to pay off your balance in full each month.
Another way, if you’re trying to get rid of high-interest credit card debt, is to use a credit card with a 0% balance. These offers allow you to pay off major credit card debt and pay it off interest-free for a specified number of months. But you should also consider the balance transfer fee in the equation when calculating whether or not this is a good option for you.
Find out more: This trick can reduce your credit card stake in HALF
You want convenience and extra benefits
Paying with a credit card is easy and convenient, especially if you already have one on hand and don’t need to request a new one. If you’re smart, you can also maximize the rewards of purchases by making sure you’re using the best card for your purchase. Sometimes you get a refund, a credit or points for travel and accommodation.
While rewards shouldn’t be the main reason for using a credit card, they can be a nice perk if you decide that a credit card is your best bet.
Personal Loan vs. Credit Card: Which One Is Right for You?
When you need to pay off a small balance, a quick credit card transaction is simple and seamless. As long as you pay off the balance at the end of the month, a credit card is the better choice.
But if you’re on a large expense and expect to take some time to pay off the balance (such as three to five years), consider taking out a personal loan with a lower interest rate instead. Compare some of the best personal loans to see which online lender has the most competitive rates and repayment terms for you.
The bottom line is, regardless of your choice, you need to adjust your budget and make room for a new release. Consider adding a calendar reminder to make sure you don’t forget payment due dates – and to responsibly pay off your debt.