One of the most common decisions when managing your finances is whether to use a personal loan or a credit card.
Both offer access to funds but have different advantages and drawbacks.
Interest on Personal Loan vs. Credit Card
Interest is the cost of borrowing money, which can vary greatly between the two.
- Personal Loan Interest Rates: Personal loans generally come with fixed interest rates. These rates range from 6% to 36%, depending on your credit score and the lender. The key advantage of personal loans is that the rate is typically lower than credit cards, especially for those with good to excellent credit scores.
- Credit Card Interest Rates: The average interest rate for credit cards in the U.S. is approximately 20% to 25%. This rate is typically variable, meaning it can change over time based on market conditions. If you carry a balance on your credit card, the high interest can quickly escalate the amount you owe.
For example, if you take out a $10,000 loan at a 10% interest rate over 5 years, you could expect to pay around $2,500 in interest.
On the other hand, if you carry a balance of $10,000 on a credit card with a 20% APR, the interest for the same amount can reach over $2,000 in just one year.
You can find personal loan rates from various lenders using websites like LendingTree and CreditCards.com.
Which is Best for Small Purchases under $5,000?
A small personal loan vs. a credit card may seem tough.
- Credit Cards for Small Purchases: Credit cards allow for easy payments over time, and many offer rewards or cash back on purchases. However, the high interest rates will quickly add up if the balance isn’t paid within the grace period.
- Personal Loan for Small Purchases: Personal loans may be better for larger small purchases because they often offer a fixed interest rate and repayment schedule, which helps with budgeting. For instance, a personal loan of $5,000 at a 9% interest rate for a term of 2 years would have a fixed monthly payment of around $235, which could be easier to manage compared to unpredictable credit card payments.
Paying Off Existing Debt with 0% APR
When it comes to paying off debt, choosing between a personal loan vs. credit card debt requires careful consideration of your financial situation.
- Personal Loans for Debt Consolidation: A personal loan for debt consolidation may be a better choice if you have multiple high-interest debts, such as credit cards. Consolidating your debt with a personal loan could potentially lower your interest rate and simplify your repayments by combining all debts into a single loan. For example, if you owe $10,000 on various credit cards and you can secure a personal loan at 8%, you could save hundreds of dollars in interest payments annually.
- Credit Cards for Debt Repayment: Credit cards can also be used to pay off existing debt, but they come with higher interest rates and could lead to even more debt if the balance isn’t paid off quickly. Some credit cards also offer 0% APR introductory periods, which may provide an opportunity to pay off your debt without interest if you can clear the balance within the specified time frame.
Personal Loan vs. Credit Card EMI
When it comes to managing repayments, EMI comparison focuses on how structured your payments are.
- Personal Loan EMI: Personal loans typically offer fixed monthly payments, which makes it easier to budget and plan your finances. With a fixed repayment term, you know exactly when your loan will be paid off, and the interest rate remains consistent throughout the loan term.
- Credit Card EMI: Credit cards, on the other hand, are more flexible. You can make the minimum payment or pay off more, but this flexibility can be risky because it might result in longer repayment periods and higher interest charges. With credit cards, your monthly EMI is based on your balance, which can fluctuate depending on your spending.
Personal Loan vs. Credit Card APR: Key Differences
The APR (Annual Percentage Rate) is a critical factor in determining the total cost of borrowing.
- Personal Loan APR: The APR for personal loans can range from 6% to 36%, depending on your creditworthiness and loan terms. A low APR can save you money in interest payments over the long term.
- Credit Card APR: Credit card APRs are typically much higher, often ranging from 15% to 25%. Carrying a balance on a credit card can quickly accumulate high interest, making it an expensive option in the long run.
Personal Loan vs. Credit Card Cash Advance: The Risks Involved
Taking out a cash advance on a credit card is an option, but it should be used with caution when comparing it to a personal loan.
- Credit Card Cash Advances: Credit card cash advances often come with high interest rates (typically 25% to 30%) and additional fees. Moreover, interest starts accruing immediately, and there is no grace period.
- Personal Loan for Cash Needs: A personal loan is a better choice for cash needs, as it typically comes with a lower interest rate and clearer repayment terms. For example, if you need $2,000 for an emergency, a personal loan at 10% APR would result in much lower interest costs than a credit card cash advance.
Personal Loan vs. Credit Card: Which is Right for You?
Ultimately, the choice between a personal loan and a credit card depends on your financial goals, credit score, and loan repayment ability.
- Choose a Personal Loan: A personal loan may be the better choice if you need a lump sum of money for a specific purpose, prefer fixed payments, or want to consolidate debt at a lower interest rate.
- Choose a Credit Card: A credit card may be more convenient if you’re making smaller, everyday purchases or need short-term borrowing. Just be mindful of the interest charges and try to pay off the balance quickly to avoid high costs.
Use Financial Tools
If you’re still unsure which option to choose, use online calculators to compare the total cost of borrowing for both.
Popular choices are NerdWallet or Bankrate.
Tools like Credit Karma provide access to various loan options and help you compare terms.
Many users share their experiences on platforms like Reddit Personal Finance (r/personalfinance) and provide a broader perspective.
Conclusion
In the end, choosing between a personal loan and a credit card depends on your individual needs.
Disclaimer: The information provided in this article is intended for general informational purposes only. Always consult a financial advisor before making any decisions regarding loans or credit cards.