When you need money quickly to cover an emergency expense or pay for a last-minute trip, there are several financial tools you might consider using, including personal loans and credit cards as two popular choices. But when does it make sense to use a personal loan vs. a credit card, and why would you choose one over the other? The answer largely depends on the amount you plan to spend and how soon you intend to pay off the purchase. In this article, we’ll explore when it makes sense to choose a personal loan or a credit card so you can make educated financial decisions the next time you need to cover an expense.
When A Personal Loan Makes Sense
A personal loan is a lump-sum installment loan that allows you to borrow an amount of money at once and then pay it back with predictable monthly payments for a predesignated loan term. A personal loan may be secured, meaning a lender requires collateral, like a home or car, to back the loan, or unsecured, meaning the lender doesn’t use collateral but relies solely on an assessment of your personal financial situation to determine your worthiness as a borrower.
A personal loan may make sense when you need access to a larger sum of money and don’t have the financial means to repay the total amount quickly. You might choose this type of loan to cover the following:
- Large emergency expenses: If you or a loved one has to go to the emergency room or your car breaks down and you’re facing costly repairs, a personal loan can help bridge the gap without creating the financial burden of having to repay what you borrow by next month.
- Specific financial goals, like debt consolidation: A personal loan can be a strategic financial tool to help you combine several high-interest credit cards into a single loan payment. Using a personal loan for debt consolidation may help you save money over the life of the loan if you qualify for a lower interest rate.
- Major life events: Weddings, home renovations, and other expensive life events may not be something you can pay off immediately. A personal loan gives you funds to pay vendors or contractors, and then lets you pay off what you borrowed with a reasonable monthly payment over the next few years.
When A Credit Card Makes Sense
A credit card may make the most sense if shopping online, simplifying how you pay for things, or when you need a smaller sum of money that you can repay quickly. Consider a credit card for:
- Online shopping: Since credit cards offer purchase protection and are a secure way to pay, you might choose to use your card for online purchases.
- Everyday expenses: Groceries, gas, and clothes are everyday expenses that tend to cost less than a few hundred dollars. A credit card can allow you to make these purchases and track your monthly spending closely. At the end of the month, you’ll want to pay the balance due so you won’t face interest charges.
- Travel: If you travel frequently or are planning a big trip, using a credit card to pay for travel might be a good option. That’s because certain credit cards offer points or cash back on travel, and some may even offer travel insurance or other benefits you can use for your adventure. Check the details of your credit card for travel-specific perks.
The Bottom Line
Personal loans and credit cards each serve a purpose and can help you better manage your finances. However, it pays to consider how you use each one. A personal loan may be better suited for large purchases you need to pay off over time, while a credit card tends to be optimal for covering everyday expenses you can repay quickly. As with any debt, you’ll want to ensure you have money set aside to repay the balance due before you spend needlessly on either a personal loan or credit card.
