Personal Loans vs Credit Cards: Pros & Cons
If you’re trying to manage existing debt or are planning to borrow money for a big purchase, it might be a good idea to look into the pros and cons of personal loans vs. credit cards. Depending on your specific situation, we will dig into why you might choose one product over the other.
A personal loan is an installment loan, which means you receive the entire amount at once and pay it back in fixed monthly payments.
The interest rate on a personal loan can be anywhere from 5% to 36%, depending on your credit history and lender. If you don’t have a good credit score, you’ll likely have an interest rate on the higher end, which can be much higher than what you would pay with a credit card. If you have a good credit score, you can pay much less interest at the lower end of this range than you would with a credit card. Are you interested in knowing your credit score? Check out ProFed’s free credit score tool inside ProFed Digital Banking.
Since personal loans provide a fixed amount, you can’t borrow more later if you need more money. Depending on your budget and spending habits, the fixed monthly payments could either be a pro or a con. A fixed monthly payment could simplify planning and help fit the payment into your budget. However, you won’t have much flexibility if you have trouble making these payments.
Personal loans can be used for a variety of purposes. They help consolidate existing debt or pay for a large purchase. If you have high-interest debts like payday loans or credit card balances, paying those off with a lower-interest personal loan might be a good option. Personal loans can also be the right choice if you need to make a one-time major purchase that you don’t have time to save up for. This could include paying for a wedding, replacing household appliances, or funding a home renovation project.
A credit card is a revolving line of credit. Revolving credit offers a more flexible way to borrow, but the flexibility can come with higher interest rates.
Depending on the lender, credit card interest rates range from around 15% to 25%. If you have a high credit score, credit cards are more expensive for borrowers than personal loans. However, those with lower credit scores might get a better rate with a credit card. The average credit card limit varies, but people just starting with credit cards will have lower limits.
Credit cards may be easier to qualify for than personal loans, which can come with additional perks. Many credit cards come with cash back, points, or travel rewards. However, the cards with the best rewards often require an annual fee. Some cards offer 0% APR introductory deals, which allow you to borrow interest-free for a year or 18 months. With ProFed’s Reward Credit Card, you can enjoy cash rewards and no annual fee.
If you can pay off your monthly balance, you won’t be charged any interest, but you will benefit from any rewards your credit card offers. This makes credit cards a good option for your regular purchases. They can also be a good option for debt consolidation or larger purchases if you qualify for a 0% APR deal and can pay off the balance during the 0% APR period. Credit cards usually aren’t the best way to pay for big purchases, but they could be a better option than a personal loan if you have fair or poor credit.
If you’re considering either a personal loan or a new credit card, talking to an expert can help you decide. Get in touch with ProFed Credit Union today.