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Personal Credit Cards against. Credit Cards

Understanding Credit Scores

Personal Lending

Line of Credit vs. Loan

Credit Cards

Other kinds of credit-related lending

Special Considerations

The Bottom Line

Personal Loans and Loans

Personal loans as opposed to. Credit Cards What’s the difference?

How they compare and the pros and pros and

By Greg McFarlane

Updated June 26, 2021

Review by Thomas Brock

Personal loans vs. credit cards: An Overview

Personal loans and credit cards provide a means to borrow funds and have numerous of the same credit provisions. For both loan or credit card contracts you will typically find funds offered from a lender with a specific annual rate of interest, installments that comprise principal and interest, late fees, limit on underwriting, amounts, and other. Incorrectly handling either credit could damage your credit rating, which can cause issues with loans and access to housing, finding jobs

But beyond the similar attributes personal loans and credit cards share there are also key distinctions, like repayment terms. Let’s look at the definitions and distinctions between them, along with some pros and cons of each.

The most important takeaways

Personal loans offer the possibility of borrowing funds in one lump sum, with comparatively lower interest rates. They must be repaid within a set period of time.

They are kind of revolving credit which gives the borrower access funds for as long as the account remains active and in good condition.

Credit scoring is a key element in determining the approval and terms for both personal loans and credit cards.

Individual loan or credit card contracts are structured with a wide variety of clauses and terms.

Personal Credit Card vs. Credit Cards

Investopedia / Lara Antal

Understanding the Credit Scores

Before analyzing the different features of individual loans and credit cards, it’s essential to know one of the main similarities. The U.S. and most countries have incorporated an automated credit scoring system that forms the basis for credit approvals. The three major U.S. credit bureaus–Equifax, Transunion, and Experian–are the pioneers in the development of credit scoring standards and working with lending institutions in order to facilitate credit approvals.1

Credit scores are determined by the past credit history of an individual which includes credit defaults, inquiries accounts, outstanding balances. Every individual receives an individual credit score, from this past history, which significantly affects their likelihood of credit approval. Comprehensively, all of the factors considered by lenders will affect the rate of interest a borrower pays as well as how much principal they pay if they are approved.1

Personal loans as well as credit cards may be unsecured and secured, which also has an impact on credit conditions.

In addition, paying off your credit card debt and paying off personal loans in a timely manner can help build your score on credit.

Personal Loans

Lenders offer a variety of options in the personal loan category, which can impact the terms of credit. The main difference between a personal loan and credit card is their long-term balance. Personal loans do not offer ongoing access to money like credit cards do. The borrower receives an upfront lump sum and is given a period of time to pay it back in full, using scheduled payments, and take over the loan. This type of arrangement generally has lower interest rates for those who have a great to high credit score.2

A personal loan is a great option for a variety of purposes. Unsecured loan can be used to pay for major purchases or to consolidate debt from credit cards, fix or upgrade a home, or to fund a gap in receipt of income. Unsecured loans are not secured by collateral pledged from the borrower.

Home loans as well as auto loans, and other types of secured loans are also considered a personal loan. These loans are subject to the standard procedure for credit approval, but they could be simpler to obtain because they are secured by the security of a lien on assets.

In a home loan or an auto loan such as an auto loan the lender has the right to acquire your car or home after a certain number of delinquencies. Secured loans usually come with slightly better terms since the lender owns the property involved which reduces their default risk. Here are the pros and cons of a personal loan.

Pros

It is generally recommended for purchases of large size such as homes or vehicles

Usually , it has a lower interest rate than a credit card

Offers money in one lump amount

Cons

Typically includes a service fee and could also have additional fees that all add to

The collateral property for a loan, like a vehicle or home, can be seized if you don’t pay back in a timely fashion (secured loans)

Keep in mind that interest isn’t the only expense to consider when evaluating the context of a loan. Lenders also charge fees, which can add to the total cost of a loan. Personal loans usually have an origination charge and could be subject to additional fees.

Line of Credit vs. Loan

One distinction that is worth noting is the distinction between the line of credit (LOC) and an loan. Contrary to the loan the line of credit comes with built-in flexibility, which is its main benefit. The downside is that it is typically paired with higher rates of interest.

A LOC is a preset loan amount, but borrowers aren’t required to use the entire amount. A borrower has the ability to draw funds from the credit line at any time , as long as they do not overspend the limit of credit and other conditions including paying on time minimum payments.

The LOC can be secured or unsecure (most are the latter) and is usually offered by banks. The most notable exception is a home equity line credit (HELOC) which is secured by the equity in the borrower’s home.3

Credit Cards

Credit cards belong to another type of borrowing, referred to as revolving credit. If you have a revolving credit card the borrower usually will have access to funds as long as their account is in good standing. Revolving credit card accounts may also be eligible for credit limit increases on a regular basis. Rates of interest are generally more expensive than private loans.

Revolving credit works differently than a personal loan. Borrowers have access to a specified amount, but they don’t receive that amount in full. The borrower is able to take funds from the account at at any time up to the limit. Borrowers pay only interest on the funds they use therefore, a borrower may hold an account that is open but pay no interest if they have no balance.

Credit cards are available in many varieties and offer plenty of convenience.4 The most beneficial credit cards can include 0 initial interest rates of 0 as well as balance transfer access and rewards. On the other end of the spectrum, certain can come with very high annual percentage interest rates coupled with annual or monthly fees. Credit cards can generally be used wherever electronic payment systems are accepted.

Top quality cards with rewards points can be extremely beneficial to a borrower who utilizes the perks and pay off balances every month. Rewards cards provide cash back, points for discount on purchase, points towards purchase at stores, and points toward travel.

In general credit cards can be unsecured or secured. Secured cards allow credit but without collateral. Secured cards are usually an option for borrowers with low credit scores. With a secured credit card, the borrower has to pay a portion of the card’s limit on balance. Secured cards have different conditions, so some might match the secured balance while others may provide an increase upon a certain period of time, and certain cards may transfer an amount of the balance secured to the account to make a payment after several months.

In the end, every type of credit card comes with different ways of accruing interest , so it is important to read the fine print. Unlike personal loans, where your monthly payments are usually exactly the same throughout the entire repayment period the amount due on a credit card is different each month.

Certain credit cards give borrowers the advantage of a grace period, which permits freely borrowed funds. Some cards charge daily interest, including the final interest rate at the close each month. For cards that have a grace period, borrowers can find that they have around 30 days to buy an item without interest in the event that the balance is settled prior to the time that interest starts to accumulate.5

Pros

A revolving credit balance which only charges interest when the funds are used

For those with good credit and credit scores, there are cards with 0% introductory interest rates, grace periods, and rewards

Good standing accounts are typically can be eligible for credit limit increases on a regular basis

For those with limited or poor credit, ability to improve credit terms in the future

Cons

The interest rate is typically higher than personal loans

Fees and interest can add up

On the surface the idea of financing using a credit card may seem like a simple option, but as with all borrowing, it is important to do your due diligence. Credit cards can offer an alternative to personal loans because they are offered at 0% interest and may offer some grace periods. Convenience and rewards points are other benefits. But like for any loan, interest and fees can be a considerable burden.

If you’ve been stuck with a costly card and you’re looking for a card that has a lower rate of interest, there are several cards currently available that are ideal for anyone who wants to transfer their balance.

Other kinds of credit-related lending

In general, loans and revolving credit cards constitute a large majority of the total credit market. However, beyond just typical individual loans as well as credit cards, there can also be other credit products to consider. Here are a few examples of:

Business Loans and Credit Cards

Business loans and credit cards for business are an the best option for any type of businesses. Business loan underwriting generally involves an examination of financial statements and projections. Credit cards for business are slightly easier to get and provide the same benefits as personal revolving credit cards.

Payday Loans

Payday loans are available with very high rates of interest. People who borrow money use their pay stubs to get cash advances. Payday loans are often referred to as risky loans because of their reputation for incredibly high interest and fees.6

Special Takes into Account

Credit can be an unwise business and requires a lot of diligence from the lender. A credit agreement’s nature may provide a risk for predatory lending and lending fraud, so it is crucial to understand credit terms and make sure you are borrowing from a legal business to protect yourself financially.7

The Bottom Line

Not all credit is the same. Personal loans and credit cards can be arranged using a range of terms and conditions. Personal loans offer lower rates of interest than credit cards however they have to be repaid over a specified amount of time. Credit cards allow you to have access to funds and they only charge interest on outstanding balances that aren’t paid off in a timely fashion.

No matter if you decide to choose one or the other regardless of which option you choose, your credit score is key to obtaining approval and favorable conditions. In the case of the former, using a personal loan calculator can help better understand how your credit score will affect your monthly payments.