4 Signs a Personal Loan Is a Better Option Than a Credit Card

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Don’t use the wrong borrowing method for financing your purchases.


Key points

  • Personal loans can be a better way to finance purchases than credit cards.
  • A personal loan can make sense if you can get a lower interest rate.
  • It can also be a better choice if you want a more predictable payment schedule.

If you have to finance a big purchase, chances are good you have two options. You could use a credit card to charge the item and pay it off over time, or you could take out a personal loan.

Taking out a personal loan can require more effort than just swiping a card, since you have to apply and get approved for it. But it could also be the best approach to covering your purchase costs in many situations. Here are four key signs a personal loan could be a better choice.

1. You can qualify for a lower interest rate on a personal loan

When you’re borrowing for a purchase, you always want to pay the lowest possible amount of interest over the life of the loan. Sometimes, a credit card can allow you to do that if you qualify for a 0% APR card and will have the card’s balance paid off before the promotional rate expires.

But in other cases, you either can’t qualify for a card offering no interest on purchases, or the 0% APR rate would be in effect for only a short period of time during your total repayment timeline.

In these circumstances, a personal loan with a low fixed interest rate may be a better solution for you since it will allow you to pay the least amount possible in financing charges.

2. You need a large amount of money

Many personal loan lenders allow you to borrow large sums of money. For example, if you are financing a large purchase and need to borrow $50,000 or $100,000, it’s extremely unlikely you are going to have access to such a large line of credit on a credit card.

But, depending on your credit score and income, it may be easy to find a personal loan lender willing to make such a large loan.

3. It will take you a while to pay back what you owe

Personal loans can have relatively long repayment timelines. For example, you might be able to apply for a personal loan that you can pay back over five years or longer.

If you need a long time to repay your borrowed funds, any 0% APR promotional rate on a credit card would be long expired by the time you were debt free. If you tried to use a credit card instead of a personal loan, you’d likely end up paying interest at a high rate for a long time.

With a personal loan, on the other hand, you could benefit from having the same affordable rate for the entire duration of the multi-year repayment period. Your loan could end up costing much less.

4. You want to know total costs and when your purchase will be paid off

Personal loans with fixed interest rates are predictable. When you borrow, you will know exactly what your monthly payment will be and exactly when you will be debt free. This often isn’t the case with a credit card, since many cards have variable rates. Credit cards also allow you to pay low minimums and continue charging more while you pay off your balance, so it can be hard to make progress on your debt paydown.

If you’d prefer more predictability and you’re making a larger purchase that will take a while to repay, a personal loan is often the right financing tool to use. Of course, you’ll need to consider your own unique situation when making your choice, but don’t assume reaching for a card is always the right move.

The Ascent’s Best Personal Loans for 2022

The Ascent team vetted the market to bring you a shortlist of the best personal loan providers. Whether you’re looking to pay off debt faster by slashing your interest rate or needing some extra money to tackle a big purchase, these best-in-class picks can help you reach your financial goals. Click here to get the full rundown on The Ascent’s top picks.

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