Credit Cards Vs. Personal Loans: Which Is Better?

If you're finding yourself with a minor financial shortfall, you may be wondering whether it's better to open up a credit line or get a personal loan. Credit lines and personal loans are both valuable financial instruments, but they have different advantages and disadvantages. Here are some things to consider.

Cost: Interest Rates and Origination Fees

In general, a credit card will usually be the more expensive option over time. Credit cards have rates ranging from 10% to 20%, whereas personal loans usually start below 10%. However, if you have a very poor credit rating, credit card rates, and personal loan rates may become similar. Credit cards can have annual fees, but personal loans can have loan origination fees. The exact cost will depend on your lenders.

Flexibility: Using and Accessing Your Funds

A credit line can be kept open and used over time. If you have a $1,000 expense and a $2,000 credit line, you'll be able to keep the extra $1,000 on hold for when you need it. This makes credit cards more flexible. With a personal loan, on the other hand, you need to request a specific amount and it'll be paid out at once. Thus, they are better for expenses that you know will be one time only.

Duration: The Terms of the Borrowing

Personal loans usually need to be paid back fairly quickly. Most personal loans have to be paid back within five years, though some can extend to as much as ten. A credit line, on the other hand, doesn't usually have a specific date that it needs to be paid by. Instead, you can usually pay the minimum payment on the card, which can extend to many decades of time.

Ease: Credit Requirements

Credit cards tend to be easier to get than personal loans. A personal loan will usually require fairly good credit or collateral, whereas there are credit cards available for those with poor credit scores. On the other hand, those with poor credit scores will usually get more expensive cards that require more by way of interest.

Credit cards are usually best if you have a few expenses that are coming up that you're going to need to cover—and you're trying to create a buffer in your financial situation. Meanwhile, personal loans are best for one time, significant expenses that you're trying to pay off over time. Either way, a financial adviser like Union State Bank may be able to help with the decision.