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 2018!
|Lender||APR Range||Loan Amount|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Includes AutoPay discount. Important Disclosures for Payoff.
3 Important Disclosures for FreedomPlus.
4 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
5 Important Disclosures for LendingPoint.
6 Important Disclosures for LendingClub.
All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage & history. The APR ranges from 6.16% to 35.89%. For example, you could receive a loan of $6,000 with an interest rate of 7.99% and a 5.00% origination fee of $300 for an APR of 11.51%. In this example, you will receive $5,700 and will make 36 monthly payments of $187.99. The total amount repayable will be $6,767.64. Your APR will be determined based on your credit at time of application. The origination fee ranges from 1% to 6% and the average origination fee is 5.49% as of Q1 2017. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the www.lendingclub.com website. All loans via LendingClub have a minimum repayment term of 36 months or longer.
7 Important Disclosures for Earnest.
8 Important Disclosures for Avant.
* The actual rate and loan amount that a customer qualifies for may vary based on credit determination and other factors. Funds are generally deposited via ACH for delivery next business day if approved by 4:30pm CT Monday-Friday. Avant branded credit products are issued by WebBank, member FDIC.
** Example: A $5,700 loan with an administration fee of 4.75% and an amount financed of $5,429.25, repayable in 36 monthly installments, would have an APR of 29.95% and monthly payments of $230.33
* Important Disclosures for Upgrade Bank.
Upgrade Bank Disclosures
** Accept your loan offer and your funds will be sent to your bank via ACH within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes this transaction. From the time of approval, funds should be available within four (4) business days.
|7.73% – 29.99%||$1,000 - $50,000||Visit Upstart|
|5.81% – 15.37%1||$5,000 - $100,000||Visit SoFi|
|6.87% – 35.97%*||$1,000 - $50,000||Visit Upgrade|
|8.00% – 25.00%2||$5,000 - $35,000||Visit Payoff|
|4.99% – 29.99%3||$10,000 - $35,000||Visit FreedomPlus|
|5.99% – 18.99%4||$5,000 - $50,000||Visit Citizens|
|15.49% – 34.49%5||$2,000 - $25,000||Visit LendingPoint|
|6.16% – 35.89%6||$1,000 - $40,000||Visit LendingClub|
|5.49% – 18.24%7||$5,000 - $75,000||Visit Earnest|
|9.95% – 35.99%8||$2,000 - $35,000||Visit Avant|