What’s the Difference Between a Personal Loan and a Credit Card?
When it comes to managing our finances, personal loans and credit cards are two common options that come to mind. Understanding the main difference between a personal loan and a credit card is crucial for making informed financial decisions.
Both offer access to funding, but differ significantly in terms of features, usage, repayment structure, and impact on credit scores.
The primary difference is that personal loans provide a lump sum of money you must pay in monthly installments until your loan balance is zero. In contrast, credit cards can offer you a line of credit and a revolving balance based on your spending.
Recognizing the contrasting characteristics of personal loans and credit cards is important because it allows you to decide on the most suitable option based on your specific needs and financial goals. Keep reading to obtain a comprehensive overview of their features, interest rates, repayment terms, and the effect on credit scores. Max Cash® can potentially help you secure a personal loan or credit card.5
What are Personal Loans?
Personal loans are unsecured loans that typically do not require collateral and provide borrowers with a lump sum of money that must be repaid in monthly installments over a set period of time. The main feature of personal loans includes fixed interest rates, which will not change throughout the loan term. Additionally, personal loans can offer fixed loan terms, which provide borrowers with a clear repayment schedule. A set payment schedule can help them budget accordingly.
Most personal loans are used for a specific purpose, like debt consolidation, home improvement projects, major purchases, medical expenses, or vacations. The interest rate you will receive for a personal loan (if you are eligible) will often depend on your state of residence, your lender, and your credit history.4 5
What are Credit Cards?
Credit cards operate on a revolving credit basis. That means cardholders have access to a line of credit that they can borrow against and repay over time. That means that as the cardholder pays down their balance, they can continue to borrow against their available credit line.
Credit cards can be used for everyday purchases, online shopping, veterinarian bills, medical bills, and travel expenses. They provide a convenient and secure payment method, often with added benefits such as rewards programs or purchase protection.
With credit cards, users can pay for purchases over time, albeit with interest charges applied to the accrued balance. There are many different types of credit cards available, so it is important to know what you’re looking for before you start the inquiry process for one!5
The Key Difference Between a Personal Loan and a Credit Card
Personal loans and credit cards are convenient ways to borrow money if you need some extra help this month. However, it’s important to note that they have significant differences that borrowers should be aware of in order to choose the option that best suits their needs. Let’s look at some of the critical distinctions between both lending options.
Usage
While both options can be a way to access the money you need, personal loans are best for large purchases or debt consolidation, while credit cards are best for day-to-day expenses.
Therefore, if you need to make an immediate or small online purchase, then a credit card might be your best option. But, a personal loan might be a more suitable option if you want to consolidate debt, go on a vacation, pay for a significant event, or renovate your home.
Interest Rate
The interest rate is another significant distinction between personal loans and credit cards. Depending on your financial history, personal loans can potentially have lower interest rates in comparison to credit cards. The interest rates on personal loans are fixed throughout the repayment period. Use the personal loan calculator to learn more about the interest rate of a loan and other loan terms.4 5
This gives borrowers the ability to know exactly what their monthly payments will be, allowing them to plan their finances better and potentially save on interest costs over time.
Credit card loans tend to have higher interest rates if the borrowed amount is fully paid within the first month of borrowing. The interest rate also fluctuates at times based on market conditions and the cardholder’s credit score.
Repayment Term
Personal loans come with specific loan terms, and the repayment schedule is fixed, typically for months or years. Within this loan period, the borrower is required to pay the loan every month until the principal of the loan (plus interest) is completely paid off.
In contrast, credit cards operate on a revolving credit system. This means borrowers have a predetermined credit limit and can make purchases and payments at any time within that limit. Credit cardholders can pay the minimum monthly or any other amount they choose.
Impact On Credit Score
Personal loans and credit cards can have different effects on your credit score. When managed responsibly, both have the potential to positively or negatively impact your credit history. Repaying your personal loan on time each month shows your ability to handle your debt obligations, which contributes to building a positive credit history.
Credit cards can immediately impact your credit score because of the heavy influence of credit utilization on your credit score. Keeping credit card balances low and utilizing credit responsibly is essential for maintaining a healthy credit score.
Missing payment deadlines or defaulting on personal loans can also adversely affect credit scores.
Learn How to Get a Personal Loan or a Credit Card Today
Whether you are searching for a personal loan or a credit card, Max Cash can help you explore your options and get connected to a lender or partner that fits your current financial situation.4 5 Click here to learn more about personal loans, or click here to check out a few different credit card offers!5
