Personal Loans vs. Credit Cards. Which Is Your Best Financing Solution.

By: David Halverson March 6, 2023

Personal loans and credit cards aren’t the best financing solution for all consumers, but for those who are a fit, they can provide exceptional flexibility – and lower costs. Both options can provide capital rapidly for little-to-no upfront cost, and depending on how you use the money, you can potentially also save money in the long run as well. Nothing in life is free, of course, and there are situations in which using a personal loan or a credit card for financing can trip you up financially. But as long as you’re aware of the potential costs and risks of using these types of financing, you can skirt the landmines and leverage the benefits that they offer. Here’s a look at the costs, benefits, potential risks and overall pros and cons of using personal loans vs. credit cards as a financing strategy.

Personal Loans

The primary benefits of personal loans are convenience, rapid funding and flexibility. You can apply for a personal loan from your home computer with a minimum amount of information and get approved and even funded within 24 hours. Most online personal loans have no upfront or origination fees and offer a variety of flexible terms. Typically, personal loans have no prepayment penalty, meaning you’re free to pay them off at any time. This also means that you’re usually free to refinance a personal loan at any time if you can snag a loan with a lower interest rate. Although interest rates on personal loans are usually higher than you get with secured loans, such as auto loans or home mortgages, they’re usually much lower than you’ll find with other types of unsecured loans – such as credit cards.

Credit Cards

The biggest drawback of using a credit card for any type of financing is that you’re going to be paying a high interest rate – often north of 20%. And if that’s the only rate you can get, then you should completely abandon the idea of raising capital using a credit card. But the good news is that there are ways that you can leverage credit cards for their benefits and avoid paying high interest rates. 

 The easiest way to get low-cost financing out of a credit card is to utilize a 0% promotional offer. A number of credit cards offer 0% APRs on purchases, balance transfers, or sometimes both, for periods as long as 20 months. Now, this strategy can get you into financial trouble if you aren’t in a position to pay off your balances by the end of the promotional period. Once rates return to their normal 18%, 24% or even higher, all of the interest you avoided during the promotional period will come back with a vengeance. However, if you know that you’ll have the money in place to pay off your entire debt before the 0% rate expires, this can be an excellent way to get low-cost capital. This is particularly true if you’re using the 0% rate to transfer a balance from a double-digit loan, such as another credit card.  

Which Is a Better Option for You?

If you can score a 0% promotional rate on a credit card – and you either have outstanding debts or need fresh capital – a credit card might be a better option for financing. This carries the huge caveat that if you can’t pay off the debt by the end of the promotional period, you’ll be swamped with interest costs. If this is even a remote possibility, then getting a personal loan may be the better option. Personal loan funding is fast and convenient, and it typically comes with the option for refinancing in the future if interest rates fall. The best way to determine which is the better choice for you personally is to sit down with an unbiased, no-fee loan counselor who can provide you with more specific pros and cons about all types of financing options, even beyond personal loans and credit cards.  

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