Personal Loans vs Credit Cards Explained | Pros, Cons, & Mistakes to Avoid

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If you need to borrow money to pay down your debt or to cover an unexpected expense, you have a few options that you can take advantage of. For many, these options boil down to personal loans and credit cards. But how do you know which is the right fit for your needs? Both personal loans and credit cards can provide you with a quick cash flow. However, there are pros and cons that you need to consider before you borrow from either resource. Let’s first explore both options in greater detail to give you a better understanding of how they work.

Personal Loans

We all know about credit cards. But personal loans? Those might be new ground for you. Personal loans let you borrow money that can be used for various needs, from debt consolidation and emergency expenses to home repairs and medical expenses.  To get a personal loan, you’ll need to secure it from a bank, online lender, or credit union . The rates, requirements, and terms depend on where the loan is coming from and your financial status. A personal loan is similar to a car loan, mortgage, or student loan. First, you apply for how much money you need. The lender then looks over your credit report and payment history to see whether you qualify and how much interest you’ll have to pay.  For the most part, a better credit score equals lower interest rates. It also means that you will save substantially on total interest. Once you are approved and have the loan, you’ll begin to repay it in monthly installments. This continues until you have finally paid off the debt in full. Please note that there are different types of personal loans, and some don’t require a credit check depending on the lender. Although these loans are often smaller and have high interest rates, they are a viable option if your credit isn’t in the best shape. Car title loans are another personal loan option that is typically relatively short-term. These work by you putting up your car title as collateral. Again, these loan types tend to come with really high interest rates.  And then there’s the unsecured loan. This is one of the most popular types of personal loans, as they aren’t backed by collateral. Although a credit check will likely be required, you don’t have to worry about your vehicle getting seized if you default on your repayments.

Personal Loans or Credit Cards?

Although every situation is unique, there is a rule of thumb you should always consider when choosing between the two options: Personal loans are typically the better route to go when you need to pay a larger expense over a longer time. On the other hand, credit cards are often better when you have smaller expenses that you are capable of paying off in a relatively short amount of time.  This is because credit cards are known for having higher interest rates than those of personal loans. As such, carrying a lengthy balance on a credit card can add up over time and become quite costly. Of course, there are exceptions to this rule – often ones that depend on the card and the loan terms. Like anything else, there are pros and cons to both credit cards and personal loans. Let’s take a moment to explore these in each option.

Personal Loan Pros & Cons


  • When you get a personal loan, you are typically going to spend less over time. This is partially due to personal loans having lower interest rates than those of credit cards (0% introductory APR cards are the exception). The other reason is that you have a set amount of money to spend with a personal loan. Once you’ve spent it all, it’s gone.
  • This is because you don’t have the temptation that you have with credit cards. Personal loans prevent you from continuously borrowing more money. And if you make all of your payments on time, you’ll know exactly when you will be out of debt.
  • While it’s true that both personal loans and credit cards can help you build your credit with on-time payments, you can use a personal loan to pay off your credit card debt, giving you the bonus of reducing your credit utilization ratio.
  • This ratio is the percentage of available credit that you have used. In doing so, you can effectively boost your credit score. Please note, however, that this only works if you choose to keep the card open and refuse to use it again.
  • The fixed interest rate on personal loans is another big plus. This means that your payments remain the same throughout the course of your loan. With that said, late payment fees will affect this. As such, it’s important to always pay on time and don’t get behind.


  • The downside to personal loans is that they usually have higher payments than those of credit cards. This is due to the set term, meaning your loan needs to be satisfied within that time window. As such, higher payments are usually required to make this possible.
  • Personal loans also come with their fair share of fees and penalties. Depending on the lender, you could even be charged a penalty if you pay more than what you owe. This is because you could potentially short the lender on interest charges, and some agencies don’t like that.

As such, you want to always be sure that you ask your lender about these types of charges before agreeing to anything.

Credit Card Pros & Cons


  • For starters, credit cards provide people with easy access to money. And if you already have a credit card that has available funds, you can borrow money immediately. 
  • Signing up for a new credit card tends to be a pretty straightforward process compared to personal loans. Thankfully, there have been improvements to loan applications in recent years, making them far more approachable than they used to be.
  • Introductory offers are another bonus that only comes with credit cards. Many card companies offer 0% rates to start, making them all the more appealing to borrowers. And in some cases, paying off your balance within the introductory period will eliminate having to pay its interest.
  • If your credit isn’t in the greatest shape and you’re working to repair it, you may have an easier time qualifying for a secured credit card than a personal loan. When you make on-time payments to your secured card, you can effectively repair your credit score.


  • Unlike personal loans and their fixed interest rates, there are many credit cards that come with variable interest rates, meaning that the rate is connected to another interest rate, such as the prime rate. As such, your credit card’s interest rate can increase over time.
  • This will, of course, affect your monthly payments, as well as your total interest cost. What’s more, even if you have a fixed-rate credit card, it too can increase its rates (usually if you’re making late payments).
  • If you need to withdraw cash from an ATM, there are usually fees attached to doing so. As a result, you’re not getting the full amount that you requested. If you do this often, it can quickly add up and cost you a significant amount of money in the long run.
  • As long as you own your credit card, there’s always going to be the temptation to use it. For someone trying to get out of debt, a credit card can act as their Achilles heel. If you’re serious about reducing your debt, your best move might be to cut up your credit cards and forget about them.


As you can see, you have a lot to think about. However, your decision really comes down to what you’re trying to accomplish. If you have an unexpected expense that needs to be paid off – one that a credit card can’t cover – a personal loan will allow you to do so. If you’re smart with your money and unfazed by the temptation of credit cards, you can effectively use them to build your credit. But you have to be resolute and unwilling to bend. The moment that you start using your credit card irresponsibly, all bets are off. If you’re interested in learning more about improving your financial status, we invite you to check out the rest of our articles . You’ll find an assortment of tips and guides that can help you along the way. And as always, if you have any questions, feel free to contact us so that we may assist you. We look forward to serving you and hope to hear from you soon. Sources

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