September 19, 2024

Personal Loan vs. Credit Card: Which is the Best Option?

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Need a boost of cash to pay for a big purchase or day-to-day expenses? The good news is that you have options.

Personal loans and credit cards are two of the most traditionally popular ways to access money. Personal loans give you an amount of money upfront with specific repayment terms, making them helpful for planning larger expenditures, like cars, post-secondary education, or home renovations.

Credit cards offer revolving credit. You have access to a pot of money that you can use at any time and repay on an as-needed basis (with interest). When to use a credit card varies from person to person depending on their finances, but they're generally helpful for covering daily expenses.

So, when should you use a personal loan versus a credit card? Is a personal loan better than credit card debt? And when are loans a good option to use? Understanding the differences between these two borrowing products is critical for making financial decisions that align with your goals.

Here are the pros and cons of personal loans and credit cards to help you make the best decisions for your financial journey.

What are the pros and cons of using personal loans?

Taking on a loan is a big commitment, but it’s the right move in many situations.

Here are some advantages to consider:

Specific purpose. Loans are generally ideal for specific purposes, like debt consolidation or buying a car. You apply with a large purchase in mind, and the lender gives you the money so you can pay for it. This makes it easy to avoid taking out more than you need.
Lump sum disbursement. You typically receive the funds as a single deposit into your bank account.
Fixed interest rates and origination fees. Personal loans typically have lower interest rates than other forms of debt, depending on your credit score. The rate also stays the same throughout the lending period, and any fees you might pay are clear from the start. That means you’re unlikely to get hit with unexpected expenses.
Lower interest rates. Personal loans generally offer lower interest rates than other lending products, especially when you use a form of collateral, like a house or investments.
Structured repayment. Loans provide a predictable repayment schedule, helping you plan ahead and budget accordingly.
Credit improvement. Timely payments to personal loans can boost your credit score because your credit mix and payment history increase.

Personal loans also have their drawbacks. Here are some to know:

Not suitable for regular small purchases. Personal loans generally aren’t ideal for frequent small purchases. Their higher costs and longer repayment terms make them impractical.
Constant applications. Every time you need a loan, you have to apply. The process can be time-consuming and may lead to multiple hard checks on your credit report, which can negatively impact your credit score and make it harder to secure future loans.
No rewards or benefits. Unlike credit cards, personal loans typically don’t give you extra perks, making them less appealing for consumers looking to maximize their spending.
Fees. Many personal loans come with fees, like origination fees, late payment fees, and prepayment penalties, which can significantly increase the overall cost of borrowing. Then, of course, there’s the interest.

What are the pros and cons of using credit cards?

Credit cards can drive your financial goals forward, but they aren’t as practical for big spending.

Here are some credit card advantages to consider:

Flexibility and convenience. Credit cards are one of the most flexible and convenient financial products a person can have. Most merchants accept them as a form of payment, and you can draw from your credit at any time.
Perks. One thing loans don’t offer are the perks. Many cards provide points or cashback for every purchase, which gives you free money to spend. You can also find benefits like 0% foreign transaction fees, priority boarding with partner airlines, and even mobile phone warranties.
Instant access to funds. You always have access to a revolving line of credit, helping you make purchases or cover emergencies without waiting for loan approval.

Here are some of the cons of credit cards:

Overspending. When you use a credit card, you essentially spend money you don’t have. You always have to pay it back later. The ease of use means you could spend more than you can afford and accumulate debt.
Temptation of minimum payments. Credit cards let you pay a minimum instead of the entire balance, making it easy to rack up interest.
Not ideal for large purchases. While large purchases can go on credit cards, high interest rates can make them a costly option. Whatever you use, you pay back with interest, and that means a $400 TV ends up costing you more than $400.
Fees. Many credit cards come with various fees, including annual, late payment, and foreign transaction fees, which add to their overall cost.

3 alternatives to loans and credit cards

Sometimes, personal loans and credit cards aren't the solution you're looking for. Loans are a big commitment, and they don’t work for everyday purchases. Credit cards are helpful, but they aren’t the right choice for big spending.

Here's a list of a few alternatives:

1. Earned Wage Access

If you’re short on funds while waiting for payday, use an Earned Wage Access tool like EarnIn. With Cash Out, you can get up to $100/day and $750/pay period with no interest, no mandatory fees, and no credit checks. You also don’t have to wait weeks for loan approval or deal with spiraling interest payments so you can move toward your goals with less stress.

2. Lines of credit

Lines of credit are similar to credit cards in that they offer revolving credit, which you can pull from any time. The difference is that lines of credit provide lower interest rates, making them better for larger purchases. Just keep in mind the requirements are usually stricter.

3. In-store financing

Often available for expense items like furniture, in-store financing lets you purchase goods and pay over time. Some stores even offer special interest rates or deferred interest. This is a solid option if you don’t want to take out a loan for a purchase and don’t have access to a credit card, but it only works for the stores that offer it.

Make the most of your money with EarnIn

Big purchases are one thing. But what about when you need extra cash for day-to-day expenses?

EarnIn’s Cash Out tool helps you meet your immediate financial needs without spending any money on interest. Plus, there are no mandatory fees and no credit checks.

Please note, the material collected in this post is for informational purposes only and is not intended to be relied upon as or construed as advice regarding any specific circumstances. Nor is it an endorsement of any organization or services.

1. EarnIn is a financial technology company, not a bank. Banking Services are provided by Evolve Bank & Trust, Member FDIC. Subject to your available earnings, Daily Max and Pay Period Max. EarnIn does not charge mandatory fees for use of its services. EarnIn does not charge interest on Cash Outs. EarnIn services may not be available in all states. Restrictions and/or third party fees may apply, for more information please visit http://EarnIn.com/TOS