Are Credit Card Loans Better than Personal Loans?

If you want to make a large purchase, you may find yourself torn between a credit card loan and a personal loan. Although one is not necessarily better than the other in the grand scheme of things, it is true that each one has its own set of benefits.

Understanding Personal Loans

Before you make your decision, consider the terms of a personal loan. After your approval, you will receive the total of the loan amount in a lump sum to use at your discretion. You will make fixed monthly payments for a predetermined number of months (usually between two and five years), and while the interest rate is fixed during this time, there is no penalty for repaying the entire amount of the loan early. With some credit cards, penalties for early repayment may come in the form of higher interest rates.

Unlike credit cards, you know the exact date when you will finish paying your loan when you choose a personal loan. Personal loans are also unsecured like a credit card, and while the interest rates are a bit higher than those associated with secured loans (such as a mortgage or auto loan), they are typically lower than those associated with credit cards.

When a Personal Loan Is Better than a Credit Card

For the most part, a personal loan is a better choice than a credit card when you need to make large purchases that you cannot pay off completely in a year to 15 months. Personal loans also work best if you need a lump sum of cash totaling more than $5000, which is the limit associated with most credit card companies. Pay close attention to any origination or service fees, which are as much as 1% to 5% of the value of the loan.

On the other hand, a credit card may be a better choice if you are making a purchase of less than $5000 that you will be able to repay in a year to 15 months. Read the terms of the agreement carefully as well, once the introductory period expires, you do not want to be stuck paying steep annual fees for a card you may never use again.

When determining whether you should use a credit card or a personal loan for a particular purchase, consider the APRs, the service fees, the size of your purchase, and the length of time you will need to repay it. In short, credit cards are best for smaller purchases if you have a low APR, but a personal loan is best for larger purchases when you need more time to repay.