Life is full of surprises – and not always the good kind. Your car breaks down, you end up in the hospital, or a layoff throws your whole world off kilter.
Financial emergencies happen whether we like it or not. This is why having an emergency fund is crucial. But what if an unexpected expense comes up and you’re strapped for cash?
A couple of options include charging your credit card or taking out a personal loan to cover the expense. But which one is best?
Learn the pros and cons of using a credit card vs. personal loan and which option is right for your situation.
Personal loan vs. credit card: what’s the difference?
Both personal loans and credit cards let you borrow money when you don’t have the cash. And let’s be honest: going into debt is rarely a good thing. But if you must borrow money, you can consider a personal loan or credit card to get you through.
A personal loan is a type of installment loan, which means you borrow a lump sum and then repay the loan in installments over a fixed period of time. You can get a personal loan from a bank or an online lender like SoFi or Prosper.
A credit card is a type of revolving credit, which means you can borrow money from a line of credit as many times as you want. While you must pay your bill every month, the amount depends on how much you borrowed during that particular billing period.
Credit card vs. personal loan pros and cons
Each option has its own pros and cons. Credit cards offer convenience, security, and potential rewards, but they also can have sky-high interest rates and make it easy bury yourself in debt if you’re not careful.
Personal loans give you the option to have a fixed interest rate and a fixed loan term, but they can also have stricter guidelines and additional fees.
So which would should you choose if you’re in need of cash? A personal loan or a credit card? Priyanka Prakash, a finance specialist at FitBiz Loans shared some situations when it makes sense to use a credit card and when it makes sense to use a personal loan.
Use a personal loan when:
- You are making a purchase that you’d like to pay off over several months.
- The lender offers a low interest rate that you can potentially use to refinance higher-rate credit card debt.
- The lender doesn’t charge fees, but your credit card company does charge an annual fee.
Use a credit card when:
- You are making a purchase that you can pay back in full the next month.
- The purchase(s) you are making also earn rewards or cash back points on the credit card.
- The credit card offers 0% interest for a limited time.
In other words, credit cards are a good option if you need short-term help and can pay off the debt relatively quickly. If you have a card with 0% APR and can pay off your balance before the promotional period is up, using a credit card is probably your best option.
If you have a large expense that you know will take you several months or years to pay back, a personal loan may be a more cost-effective option due to the lower interest rates and fixed loan term.
A personal loan can even help you consolidate your credit card debt and save money on interest. So if you have several credit cards with balances and high interest rates, you can take out a personal loan and pay off your balances. You’d then have one monthly payment, one interest rate, and a set repayment term.
Whether you decide to opt for a personal loan or credit card, it’s important to project your payoff time and calculate how much interest you’ll pay with each option. In addition, it’s crucial to look at the fine print and understand if there are any additional fees or requirements.
Using a personal loan or credit card to pay for expenses should be a last resort. These options should also only be considered for necessary expenses — not that dream trip to Hawaii or a new designer wardrobe.
In an ideal world, you would pay for everything in cash or pay off your credit cards in full each month. While there may be times when that’s not possible, you can start saving now to ensure future surprise expenses don’t put you in the position of having to choose between a personal loan or credit card to get by.
While paying down your debt, commit to putting a portion of your income toward savings each month. I recommend saving at least 10 to 20 percent of your income each month, but if that’s not possible start with whatever you can. Having a cushion of cash can give you more repayment options for when the next emergency arises.
Interested in a personal loan?Here are the top personal loan lenders of 2017!
|Lender||Rates (APR)||Loan Amount|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Important Disclosures for Citizens Bank.
Terms and Conditions Apply: SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi's underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Finance Lender Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (www.nmlsconsumeraccess.org)
Citizens Bank Disclosures
Personal Loan Rate Disclosure: Variable rate, based on the one-month London Interbank Offered Rate (“LIBOR”) published in The Wall Street Journal on the twenty-fifth day, or the next business day, of the preceding calendar month. As of July 1, 2017, the one-month LIBOR rate is 1.22%. Variable interest rates range from 6.01% - 15.96% (6.01% - 15.96% APR) and will fluctuate over the term of your loan with changes in the LIBOR rate, and will vary based on applicable terms and presence of a co-applicant. Fixed interest rates range from 5.99% - 16.24% (5.99% - 16.24% APR) based on applicable terms and presence of a co-applicant. Lowest rates shown are for eligible applicants, require a 3-year repayment term, and include our Loyalty and Automatic Payment discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
|5.67% - 29.99%||$1,000 - $50,000||Visit Upstart|
|5.17% - 14.24%1||$5,000 - $100,000||Visit SoFi|
|8.00% - 25.00%||$5,000 - $35,000||Visit Payoff|
|5.99% - 16.24%2||$5,000 - $50,000||Visit Citizens|
|5.99% - 35.89%||$5,000 - $50,000||Visit LendingClub|
|5.25% - 12.00%||$2,000 - $50,000||Visit Earnest|
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