Are Credit Card Loans Better Than Personal Loans?

When you need to borrow, you might consider a credit card or a personal loan. Credit cards are ideal for short term expenses that you can pay off in a month, while personal loans are best use for long term expenses, financing a big purchase or consolidating multiple debts. Your decision to use a credit card or personal loan will depend on your credit score, how much you want to borrow and how long you have to repay it. Moolr take a look at whether credit card loans are better than personal loans.

How Credit Cards Work

Credit cards are one of the most expensive forms of financing, with interest rates in the double digits unless you have credit good enough for a 0% promotional offer. On your credit card’s payment due date, you are obligated to make a minimum monthly payment – generally around 1% to 3% of the balance – but you’ll need to pay it off in full to avoid accruing interest. Interest is calculated based on the average daily balance during the month, not the ending balance.

Credit card debt is “revolving” debt. You have a limit on how much debt you can have on the card; the amount of credit you have available from month to month depends on how much you spend and how much you repay. As a general rule, credit cards are unsecured, which means they aren’t backed by collateral.

Credit Card Uses

Because of their high interest rates, credit cards are best reserved for short term financing. Use a credit card only for purchases that you’ll be able to pay off by the due date, like daily expenses or monthly bills. You could use cash or your debit card for these same purchases, but credit cards have benefits outside of free short-term financing. Many cards come with cash or travel rewards, typically ranging from 1% to 2% of what you spend, or spending protections, extended warranties and trip insurance.

How Personal Loans Work

Personal loans may be secured or unsecured. They often have lower interest rates than credit cards, especially if you have good credit. Unlike credit cards, a personal loan is an “instalment” debt – you get money in a lump sum and make equal payments over a specific period – usually two to five years. Your loan payments will include principal and interest.

Personal loans are best used for longer term financing. This could include things like expenses for adopting a child, starting a small business or consolidating credit card or other debt. Since personal loans typically have lower interest rates than credit cards, they are a better option if you aren’t able to pay off your balance in full each month.