Comparing Personal Loans and Credit Cards

When you need money, choosing the right credit source is as important as getting quick access to it. The key to choosing the best type of credit is understanding their differences and similarities. Consider two of the most common credit types that Americans turn to: credit cards and personal loans. What makes these similar and what sets them apart? Here's a short guide to help you make the best choice.

How Are Credit Cards and Personal Loans Similar?

Both credit cards and personal loans have some important similarities. First, both are usually unsecured loans. This means that no collateral is attached to the loan terms, so there is nothing the lender can seize if the loan isn't paid back. This sets both apart from secured loans, which put at risk some attached asset. Secured loans include auto loans (and title loans) as well as mortgages and home equity loans.

Both personal loans and some credit cards can also serve as good ways to consolidate debt. Because a personal loan generally comes with a lower interest rate, it is often used to pay off other forms of higher-interest debt. Certain credit cards can offer the same advantage, but only if they carry a very low interest rate. Both loans and credit cards may charge a one-time fee to facilitate this debt consolidation.

Traditionally, credit cards' main appeal was the ease of accessing them and receiving approval. But modern loan methods have made personal loans often just as quick and easy as getting approved for a credit card. Many other forms of credit, such as home equity loans or lines of credit, tend to require much more work to secure.

How Are Personal Loans and Credit Cards Different?

In addition to their similarities, you should also know the ways that these two funding sources differ.

A credit card is a form of revolving credit. Like home equity lines of credit, credit cards can be tapped many times. Charges are made, paid off, and other charges made again. This carries a serious risk. Many people who use revolving credit find that they never actually pay off the debt but continue to charge new expenses. In contrast, personal loans are a one-time form of credit. You cannot get into the debt cycle.

Another major difference is how your payments are calculated monthly. The payment for a personal loan each month is calculated at the beginning of the loan and generally doesn't change for the life of the loan. Credit cards' payment amounts change each month, making budgeting more difficult. Late or missed payments can also cause payments to balloon. But the payment may also go down as you pay off the principal.

Finally, interest rates on credit cards are usually higher and may change unexpectedly. Because the terms of a loan are set at the beginning, you know the interest rate you will pay for the entire loan term. Credit cards may adjust their rates based on your payment history at any point.

How Can You Choose the Right Credit?

What is the right source of credit for your situation? It depends on what you need credit for. If you know how much you need to borrow and want more stability, a personal loan may be the right call. If you want the ability to charge multiple times, revolving credit may be the better option. And other factors, such as the interest rate, could help you decide.

No matter what your credit needs, start by learning the specifics about options you have available. At Central Finance , we offer a variety of loan sizes and terms to fit each borrower's goal. Call or stop by today to learn more.