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Updated on Friday, September 21, 2018
If you need to borrow money and pay it back over time, you may want to consider an unsecured credit card or a personal loan. Neither option requires you to put down collateral, and you can spend the money however you want.
Before you choose between a personal loan or a credit card, however, it’s smart to take a close look at both options to see which one might leave you better off. The best option for your situation will probably depend on how you plan to use the money, how much you need to borrow, and how long you need to pay your loan back.
How do personal loans work?
Personal loans allow consumers to borrow money with a fixed interest rate, a fixed monthly payment, and a fixed repayment schedule. This means you’ll know exactly how much you need to pay each month as well as the date you’ll pay your loan off.
Most personal loan companies let you borrow up to $35,000, although some companies do extend higher amounts to those who qualify. Generally speaking, these loans are best for individuals who need to borrow a large amount of money and pay it back over a longer timeline.
Personal loan benefits
Personal loans can work well for a variety of situations, whether you need to borrow money to consolidate debt, pay for a major home repair, or cover unexpected medical bills. The main benefits of personal loans include:
- With a fixed repayment plan, you know exactly when you’ll pay your loan off.
- Securing a fixed interest rate means you will never have to worry about interest charges ballooning out of control.
- Having a fixed monthly payment can make budgeting for your personal loan easier.
- Interest rates on personal loans can be lower than other forms of debt, depending on your credit score.
Drawbacks of a personal loan
Personal loans can provide you with the cash you need, but that doesn’t mean they’re perfect. These loans come with costs you need to be aware of as well as their own share of downsides. For example:
- Personal loans often come with fees, such as an origination fee of 1% to 8% of your loan balance.
- You may not qualify for the lowest interest rates if you have poor credit.
- You have to borrow a set amount upfront, versus credit cards that offer a line of credit you can borrow against.
Qualifications for approval
To qualify for a personal loan with your best rates and terms, you usually need good or excellent credit. Some personal loan companies will accept consumers with credit scores as low as 580, but only if they pay a higher interest rate.
In addition to having the credit to qualify, you also need to be able to prove your ability to repay by presenting pay stubs or other proof of employment. Since lenders prefer to loan money to borrowers who aren’t overly strapped for cash, you’ll also need a debt-to-income ratio that isn’t too high.
Your debt-to-income ratio is determined by taking your total monthly debts and dividing them by your monthly income. If you have $2,000 in total monthly recurring debt and your monthly income is $4,000, your debt-to-income ratio would be 50%. According to Discover Personal Loans, consumers with debt-to-income ratios below 36 percent may qualify for personal loans with the lowest rates and terms.
If you don’t meet the criteria to qualify for a personal loan on your own, you may be able to qualify with the help of a co-signer.
When is a personal loan better than a credit card?
A personal loan may be better than a credit card in the following situations:
- You need several years to repay your loan and prefer a fixed interest rate and monthly payment you can count on. While credit cards also let you borrow money to make purchases, most come with variable interest rates and monthly payments that can go up and down based on interest rates and the amount you owe.
- You need to borrow money to pay expenses you can’t pay with a credit card, such as repaying a family member you borrowed money from. A credit card can be a valuable tool, but it’s not ideal if what you really need is cash. A personal loan is better if you need cash deposited in your bank account.
- You want to consolidate debt at a lower interest rate but need several years to pay it off. Some credit cards offer 0% interest on purchases or balance transfers for up to 21 months, but the interest rate will be reset after the introductory offer is over. If you need more time to pay off debt at a lower interest rate, a personal loan could make more sense.
Where to find the best personal loans
While you can check local banks and credit unions to compare their personal loan options, an easy way to research and assess offers is by doing it online. MagnifyMoney offers a comprehensive list of the best personal loan offers currently on the market that makes it easy to see how each one stacks up.
Remember that the best way to find your ideal personal loan is to compare offers from several lenders, not just one. Make sure to compare loan terms, fees, and interest rates to find your best deal. LendingTree allows you to compare mutliple offers at once without hurting your credit score. Use our table below!
As low as 3.49%
Minimum 500 FICO®
24 to 60
LendingTree is our parent company. LendingTree is unique in that you may be able to compare up to five personal loan offers within minutes. Everything is done online and you may be pre-qualified by lenders without impacting your credit score. LendingTree is not a lender. Terms Apply. NMLS #1136.
As of 17-May-19, LendingTree Personal Loan consumers were seeing match rates as low as 3.49% (3.49% APR) on a $10,000 loan amount for a term of three (3) years. Rates and APRs were based on a self-identified credit score of 700 or higher, zero down payment, origination fees of $0 to $100 (depending on loan amount and term selected). Terms Apply. NMLS #1136
How do credit cards work?
A credit card provides you with a line of credit you can use to make purchases, transfer a balance, or take out a cash advance. Credit cards usually come with variable interest rates, and interest is charged daily on your balance. If you pay your balance in full every month, however, you can avoid interest charges and use your line of credit over and over again.
Since the amount you borrow with a credit card will vary depending on the purchases you make, your payment can vary from month to month. However, you’re required to make a minimum monthly payment each month, which may be as low as 2.5% of your balance.
Benefits of a credit card
A credit card can be a valuable tool you can use to your advantage, particularly if you need to make a smaller purchase you can pay off in a short amount of time. The main benefits of credit cards include:
- Some credit cards offer 0% APR on balance transfers and purchases for a limited time, usually 12 months or longer.
- You pay no interest fees if you pay off the card in full every month.
- Some credit cards offer rewards on your purchases, such as cash back or travel rewards.
Drawbacks of a credit card
Credit cards can be ideal if you get a 0% offer or can pay off a large purchase quickly, but there are downsides that come with them compared to personal loans. Some of the drawbacks include:
- Even though some credit cards offer 0% interest for a limited time, credit cards charge an average interest rate of 15.5%.
- Your monthly payment may be harder to plan for since it is based on a variable interest rate, as well as your credit card balance.
- Some credit cards charge annual fees. You may be charged other fees as well, such as late fees, over-the-limit fees, cash advance fees, foreign transaction fees, and balance transfer fees.
Qualifications for approval
The qualifications to get approved for a credit card are typically the same as the ones for personal loans. You need good or excellent credit to qualify for a credit card with your best interest rates and terms, for example. You also need to be able to prove your ability to repay with proof of employment and a reportable income. Finally, you need to have a reasonable debt-to-income ratio since the bank won’t want to let you borrow more than you can afford. According to Experian, many lenders prefer a debt-to-income ratio below 36%.
If you’re curious to see whether you could get a credit card of your own, there are also several ways to check if you’re pre-qualified.
When is a credit card better than a personal loan?
While personal loans can make sense when you need to borrow money, there are times when a credit card can be a better deal. Examples include:
- You can qualify for a 0% APR offer and repay your balance before your card’s introductory offer ends. If you only need to borrow money for a few months, a zero interest credit card can work as an interest-free loan.
- You’re unsure how much you need to borrow and prefer a line of credit over a loan. Since credit cards only require you to repay amounts you borrow, they can make more sense if you need a line of credit to borrow against as needed.
- You have the cash to repay your balance and avoid interest, so you want to rack up rewards. If you have the cash on-hand to repay amounts you borrow right away, a rewards card will let you earn points or miles for each dollar you spend. Keep in mind, however, that it’s a bad idea to pursue rewards if you plan to carry a balance, since the interest you’ll pay is likely more than the rewards you’ll earn.
Where to find the best credit cards
Credit cards are easy to apply for online, which is why it makes so much sense to start your research on the internet. MagnifyMoney breaks down the best credit cards in every category, which makes comparing cards and their benefits a simple task. Make sure to compare all factors before you decide on a card, such as the interest rate, 0% APR offer and terms, and any applicable fees.
Credit cards vs. personal loans
Average Interest Rate
The average annual percentage rate (APR) of credit cards is currently about 15.5%. However, credit card APRs can range from as low as 9.9% to as high as 29.99%
Personal loan rates are as low as 3.49%, depending on the borrower's credit history. For those with “good” credit (a FICO score between 680-720), APRs currently range from 10 to 13%.
Credit cards typically charge a variable rate. Credit card interest rates can change based on market rates and can change to a penalty rate if you miss payments.
Personal loans typically come with a fixed interest rate, fixed monthly payments, and a fixed repayment term.
Your monthly payment will depend on your balance and your interest rate. Formulas for minimum monthly payments differ among credit card issuers, but they can be as low as around 2.5% of the outstanding balance.
Your monthly payment is a fixed amount based upon the amount you borrow, the length of your loan, and your interest rate.
Average Loan Limit
Your credit limit depends on several factors, including your income and your debt-to-income ratio.
Many lenders offer personal loans up to $35,000, but some offer bigger loans to those who qualify.
Credit cards can come with annual fees. You may also have to pay late fees, over-the-limit fees, cash advance fees, and foreign transaction fees. Consumers who transfer a balance pay an average balance transfer fee of 3.46%.
Personal loans have an origination fee of 2% to 5% of the amount borrowed (some can go as low as 1% or as high as 8%). Not all lenders charge origination fees, however.
Personal loans vs. credit cards: Which one is right for you?
Before you decide between a personal loan and a credit card, think long and hard about why you need to borrow money and what kind of terms you’d require to pay it back. Some questions to ask yourself as you continue your research include:
- What do you need the funds for? While personal loans can work better if you need actual cash to spend, a credit card could also work if you need a line of credit to make a purchase.
- How much can you afford to repay every month? If you can only afford to repay a set amount of money each month, a personal loan with a fixed monthly payment could be ideal. To find out how much you could borrow and still get a monthly payment you can afford, check your options with this personal loan calculator.
- Are you consolidating debt? If you’re consolidating debt, you need to be able to qualify for a lower interest rate than the average rate you’re paying now. Compare credit cards and personal loan offers to see which ones offer the lowest interest rates for your credit score and situation.
- How much do you need to borrow? A personal loan could be better if you need to borrow a larger amount and pay it back over several years.
- How long do you need to repay your loan? If you believe you can repay borrowed funds within the span of a year or slightly longer, a balance transfer card that offers 0% on purchases and balance transfers could work as an interest-free loan. Keep in mind, however, that you may need to pay a balance transfer fee if you transfer a balance, depending on the card you apply for.