Personal Loans vs. Credit Cards
Understanding the Credit Scores
Personal Credit
Line of Credit vs. Loan
Credit Cards
Other types of credit lending
Special Beacons
The Bottom Line
Personal Loans and Loans
Personal Loans as opposed to. Credit Cards What’s the difference?
How they compare and the pros and cons of each
By Greg McFarlane
Updated June 26 2021
Review by Thomas Brock
Personal loans vs. Credit Card: A Review
Personal loans and credit cards provide a means to borrow money and include numerous of the same credit terms. For both loan or credit card contracts you’ll typically find money that are provided by a loan provider at a specified annual rate of interest, payments which include interest and principal and late fees, as well as limitations on the amount of credit, underwriting requirements, and more. Making mistakes with either type of credit could damage your credit rating, causing issues with loans, access to good housing and even finding work
But beyond the similar attributes personal loans and credit cards share they also have some significant distinctions, including the terms of repayment. Let’s look at the definitions and distinctions between the two with some pros and cons for each.
The most important takeaways
Personal loans offer money borrowed in one lump sum that has lower interest rates; they have to be paid back over a finite period of time.
The credit card is a form of revolving credit which gives a borrower access to funds as long as the account is in good standing.
Credit scoring is a key aspect that influences the terms and approvals for personal loans and credit cards.
Personal loan as well as credit card arrangements are designed with a variety of terms and provisions.
Personal Loans vs. Credit Cards
Investopedia / Lara Antal
Understanding the Credit Scores
Before diving into comparing the different features of individual loans as well as credit card, it’s crucial to be aware of one of the big similarities. The U.S. and most countries have implemented an automated credit scoring system that provides the basis of credit approvals. The three main U.S. credit bureaus–Equifax, Transunion, and Experian–are the leaders in establishing credit scoring standards and partnering with lending institutions to enable credit approvals.1
Credit scores are based on a person’s past credit history, including inquiries, credit defaults accounts, inquiries, and outstanding balances. Every individual is assigned a credit score from this past history, which heavily influences their chances for credit approval. Comprehensively, all of the elements considered by lenders will affect the interest rate a borrower pays and what amount principal they pay if they are approved.1
Personal loans and credit cards can be unsecured and secured, which also has an effect on credit terms.
Paying your credit card debt and paying off personal loans promptly can help build the credit rating.
Personal Loans
Lenders offer a variety of options within the personal loan category that could affect the terms of credit. The main distinction between a personal loan and credit card is their permanent balance. Personal loans don’t provide ongoing access to funds like credit cards do. A borrower is offered an upfront lump sum and has a finite time frame to repay it in full, using scheduled payments, or to retire the loan. This type of arrangement generally is accompanied by lower interest rates for borrowers with a good to high credit score.2
A personal loan can be utilized for many reasons. An unsecured loan can be used to pay for major purchases and reduce credit card debts, or repair or improve a house, or even to cover gaps in income. Unsecured loans do not have the backing of collateral pledged from the borrower.
Home loans, auto loans and various other forms of secured loans are also considered a personal loan. These loans will be subject to standard procedures to be approved for credit, however they may be easier to obtain because they are backed by a lien on assets.
In the case of a home loan or an auto loan such as an auto loan the lender has the right to acquire your vehicle or your home after a specified number of delinquencies. Secured loans usually come with slightly more favorable terms due to the fact that the lender owns the property that reduce their default risk. Here are the pros and cons of a personal loan.
Pros
Most often, it is best to use this method for larger purchases such as homes or vehicles
Usually offers a lower rate of interest than credit cards
Funds are available in one lump sum
Cons
Typically, the service fee is included and can also include other charges which add to
Assets used as collateral for a loan, like a vehicle or house, could be seized if you don’t make payments on time (secured loans)
Keep in mind that interest isn’t the only cost to be considered in the process of obtaining a loan. There are also fees charged by lenders which could add to a loan’s total costs. Personal loans generally have an origination charge and could be subject to additional fees.
Line of Credit vs. Loan
A distinction worth pointing out is the distinction between an unsecured line of credit (LOC) and an loan. In contrast to the loan the line of credit is built with flexibility–its main advantage. Its disadvantage is that it is typically paired with higher interest rates.
A LOC is a preset loan amount, but borrowers do not have to utilize the entire amount. A borrower can access funds from the credit line at any time , as in the case that they do not exceed the credit limit terms and other conditions including paying on time minimum payments.
The LOC is secured as well as unsecured (most are the one that is secured) and is typically provided by banks. A major exception is the home equity line of credit (HELOC) that will be secured through the equity of the borrower’s home.3
Credit Cards
Credit cards belong to another type of borrowing known as revolving credit. When a credit card is revolving the borrower usually will have access to funds for as long as the account remains in good standing. Revolving credit card accounts may also be eligible for credit limit increase regularly. Interest rates are typically greater than those for personal loans.
Revolving credit operates differently from the personal loan. Creditors have access to a specified amount but they do not receive that amount in full. The borrower is able to take funds from the account at anytime up to the maximum amount. Borrowers pay only interest on the amount they spend, so a borrower could hold an account that is open but pay zero interest if there is no balance.
Credit cards are available in many varieties and offer a lot of convenience.4 The most beneficial credit cards can include 0 percent introductory interest, balance transfer availability, and rewards. On the other end on the scale, some can come with higher annual percentage rates of interest combined with monthly or annual fees. Most credit cards can be used wherever electronic payment systems are accepted.
High-quality cards that offer rewards points can be highly advantageous for those who takes advantage of the benefits and pays balances down each month. Rewards cards give money back or points for reductions on shopping, rewards towards purchase at stores as well as points towards travel.
In general credit cards can be unsecured or secured. Secured cards allow credit but without collateral. Secured cards are usually an option for those who have low credit scores. With a secured card, a borrower is required to contribute capital to the limit of the balance on the card. Secured cards have different terms so some may match the secured balance, some may offer an increase upon a certain amount of time, and others may add the secured balance to the card as a payment after a few months.
In the end, every type of credit card comes with different ways of accruing interest , so it is essential to study the fine print. Contrary to personal loans, where your monthly installment is typically the same over the entire period of repayment the credit card bill will vary each month.
Some credit cards offer consumers the benefit of a grace period, which permits the borrowing of funds without restriction. Other cards will charge interest on a daily basis, and this includes the final interest charge at the close in the calendar month. For cards with grace periods, customers may find they have 30 days to buy something without interest when the balance is paid prior to the time that interest starts to accumulate.5
Pros
A revolving credit balance which does not charge interest until funds are utilized
For those with good credit cards that offer zero interest rates for introductory periods, grace periods, and rewards
Good standing accounts are typically are eligible for increases in credit limit regularly
For those with less than poor credit, they may be unable to build up to better credit terms in the future
Cons
Interest typically higher than personal loans
The cost of interest and other fees can be a significant amount.
In the beginning, financing with credit cards might seem to be a good option, but as with all borrowing, you need to conduct your research. Credit cards can offer a viable alternative to personal loans since they can be offered at 0% interest rates and could also offer grace time. Convenience and rewards points are additional benefits. However like for any loan the cost of interest and fees could be quite a burden.
If you’ve been in the middle of a large bill and are looking for something that has a lower rate of interest There are a variety of cards currently available that are ideal for anyone who wants to transfer their balance.
Other kinds of credit-related lending
The majority of the time, loans as well as revolving credit card comprise a significant majority of the total credit market. But, in addition to traditional credit cards and personal loans and credit cards there may be additional credit products for consideration. Here are a few examples of:
Business Loans and Credit Cards
Business loans and business credit cards can be the best option for any type of companies. Business loan underwriting generally involves an analysis of financial statements and projections. Business credit cards can be slightly easier to get and have the same advantages like personal revolving credit cards.
Payday Loans
Payday loans are provided with high interest rates. Borrowers use employment pay stubs to get cash advances. Payday loans can be categorized as predatory loans due to their reputation for extremely high rates of interest and fees.6
Special Considerations
Credit is an extremely risky business, and it requires a lot of diligence from the lender. A credit agreement’s nature may offer a chance for predatory lending or lending fraud, therefore it is crucial to be aware of the terms used in credit agreements and ensure that you’re borrowing from a legitimately authorized business to protect yourself financially.7
The Bottom Line
There are many different types of credit that are not the same. Personal loans and credit cards can be structured with a wide variety of provisions and terms. Personal loans are generally lower in rates of interest than credit cards but must be repaid over a specified period of time. Credit cards provide ongoing access to cash and only charge interest on balances due which aren’t paid promptly.
Regardless of whether you choose one or the other the credit score is essential in securing approval and favorable conditions. For the latter, using a personal loan calculator can help better understand the way your credit score will affect your monthly payments.
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Personal Guide to Getting a Loan
Personal Loan: Definition, Types, and how to get one
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Understanding Different Loan Types
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Unsecured Loan
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Signature Loan
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What is Peer-to-Peer (P2P) Loans? The definition and the way it operates
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What is a Payday Loan? What is it, how to get One, and legality
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Are personal loans tax deductible?
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Are Personal Loans Considered Income?
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Can Personal Loans Be Included in Bankruptcy?
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Can Personal Loans be Transferred to a different person?
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What effect do personal loans have on your Credit Score
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What is an amortization schedule? How to Calculate With Formula
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Personal Loan Interest Rates: The Way a Personal Loan Is Calculated
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How do you apply for a Personal Loan
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Best Personal Loans
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The Best Small Personal Loans
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Best Bank Loans
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Best Peer-to-Peer Lending
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Personal loans with low interest loans
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Best Online Personal Loans
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Best Credit Loans for Bad Credit
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The Best loans for fair Credit
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The best personal loans for people with good credit
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The Best Home Improvement Loans
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