Choosing Between a Personal Loan and a Credit Card

At some point in time, you may wonder whether it is more advantageous to take out a personal loan or use a credit card. Both can be used to your benefit if you are financially responsible and your financial situation requires one or the other financial instruments. Here is what to keep in mind.

A personal loan may be a better option if you have to deal with a one-time expense, which you cannot meet at present. For example, you need $1,500 for home repairs or moving across the country. You will be offered a lower interest rate than your credit card issuer charges, especially if you have a good to excellent credit score.

Personal loans have another beneficial feature – you can choose your loan repayment term and monthly payments up front. This way, you know how much you pay back a month and can keep track of your progress. Credit cards present an obvious disadvantage here, with borrowers falling into the minimum payment trap. They never know if they are any close to getting rid of credit card debt, spending lots of money on never-ending charges.

At the same time, credit cards have their benefits, too, including the possibility to book travel, hotels, holidays, etc., shop online, and much more. Credit cards offer you flexibility. Moreover, cardholders enjoy purchase protection and loss protection. They are insured for a specified period in case they charge a faulty item to the card. Insurance may also cover items that are lost or stolen. Of course, credit cards are offered with different terms and conditions, and some credit card issuers may offer no protection at all. Loss protection is another beneficial feature in case your credit card is stolen or lost. If you lose cash, it may be lost forever. With credit cards, you can just call your card issuer as to put a stop on it. You are issued a new card to replace it.

In addition to these beneficial features, you can use a credit card to establish or rebuild your credit score. This will improve your chances of being approved for mortgages, business loans, credit cards with lucrative terms, 0 percent deals, and more.

Credit cards are also beneficial if you face a cash emergency. These may include a fire, flood or car breakdown, with you having to book a motel room or rent a car for a couple of days. Finally, credit cards come with a variety of perks such as insurance coverage, cash back, reward points, discounts from a variety of companies and stores, etc. These can be quite beneficial but keep in mind that you have a spending limit.

Are there any downsides as well? First of all, card issuers encourage you to spend money you do not really have. The interest rates on most credit cards are higher than the rates on personal loans, and you may dig yourself deep in debt. Loans, on the other hand, are intended for big-ticket items and more expensive purchases, allowing borrowers to spread the cost and manage their finances in the long run. This is especially true for loans with fixed interest rates. Finally, the fierce competition between banks and other financial establishments makes it easier for borrowers to negotiate even lower interest rates than what was originally quoted.