Should I Get a Personal Loan or Use a Credit Card?

Posted by on December 10th, 2015 in Accounts

You need money — fast. Unless you have well-to-do (and generous) relatives or friends, your options are pretty much limited to taking out a personal loan or relying on a credit card. Which one is best for you will depend on a few things.

What are the differences between personal loans and credit cards?

A personal loan from a financial institution such as Abri Credit Union is a lump sum of money that you pay off over a specified period of time, usually a few years. Depending on your credit score, the loan may need to be secured by some asset you already own.

A credit card is akin to an ongoing loan. You are given a limit of how much you can borrow on the card, and you can pay off your charges whenever you want to or can. The only requirement is that you make a monthly minimum payment (around 1% to 3%) on the amount owed.

Both charge interest, of course. Generally, interest rates on personal loans are lower, but then they are a stricter borrowing option. Credit cards offer more leeway, at a cost of higher interest rates.

When should I take out a personal loan?

Personal loans can be for just about anything, but some common uses are to pay for a wedding or start a small business. Whatever the reason, this is the better choice when you’ll need more time to pay the money back. Because personal loans tend to have lower interest rates than credit cards, when you’re paying off your balance over two, three, four years, you’ll be paying less in interest.

You can also use a personal loan to consolidate higher-interest credit card debt. But though it might sound like a no-brainer, it will take some consideration to determine whether this is a smart move for you.

When should I go with a credit card?

A credit card, too, can be used for a wide range of reasons, but you shouldn’t unless you’re able to pay off the balance quickly. Think: monthly bills or minor unexpected expenses. Otherwise, because of their higher interest rates, you’ll wind up paying more for the privilege of borrowing.

When you use a debit card or spend cash, you part with your money right away. When you use a credit card, however, you enjoy a neat little grace period before the reckoning. But again, you don’t want to get complacent or else a good deal will turn bad quickly.

The bottom line

Both personal loans and credit cards can get you money in a pinch. Which one you choose should depend not on what the money is for but rather how soon you can pay it back. If quickly, try a credit card. If over time, a personal loan is likely best.

Lynn Mucken, NerdWallet
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