We have already published an article called, Personal Loans Vs Credit Cards: Which Should You Use? that explained which you should choose. This article considers the massive differences between them both in a way that will help you create better borrowing plans in the future. Discover the advantages of credit cards and personal loans in great detail, along with a short section on the downsides of personal loan and credit card debt.
Neither Are Good for Your Financial Future
They are both a form of debt and you should try to avoid debt at all costs. We at eCheck even have numerous guides on wealth building and saving that show you ways you may buy a house without getting into mortgage debt. If your financial future involves debt, then you are placing yourself at risk. Avoid all forms of debt and save for things, even for a house, and you will be better off in most cases.
Both Are Good for Your Financial Future
If you use debt cleverly, then it may be good for your financial future. Personal loans and credit cards may help you build a credit rating so that you may enjoy cheaper interest rates for larger credit purchases such as for a mortgage and/or refinancing your student loans.
You may also use debt cleverly to save money. For example, if your car insurance says you have to pay 12 installments at $210 each, or one lump sum of $1900, then you may make a saving if you arrange credit that has 12-months of interest that costs less than $620 in interest. If your 12-month personal loan or credit card only charged you $300 for taking/paying a lump sum of $1900, then you would save $320.
Credit Card Cards Are Worse Than Personal Loans
If you are bad with money, or if you are easily tempted into spending, then credit cards offer a form of debt that is very difficult to escape from. If you are going to sink into debt no matter which type of credit you choose, then you may be better off with a personal loan rather than a credit card.
They Give People With Bad Credit the Chance to Spend a Lot
People with poor money-management skills are at the mercy of credit card companies. People that are bad with money are offered credit cards and it can ruin their lives.
Personal Loans Require More Planning Where Credit Cards Do Not
People who are bad with money are often bad at planning. A personal loan often requires planning, whereas you can get a credit card from leaflets you see stuffed in your mailbox.
Apr Rates (Interest Rates) Are Often Higher Than With Personal Loans
Typical APR rates on credit cards are around 20% to 30%, whereas typical personal loan interest rates are around 8% to 15%. The numbers vary, but that is roughly what most people are paying.
People Often Feel More Affluent Than They Actually Are
Credit card spending is fun, which is what makes it addictive. With money on your credit card, you may feel more inclined to buy items that you simply wouldn’t buy if you only had the money in your bank account.
Lenders Do Not Appreciate Numerous Credit Cards
In many cases, three personal loans at $1000 each, and three credit cards with $1000 spent on each is not favored by lenders. This is not always the case, but is a good rule of thumb.
Credit Card Debt Can Be Very Difficult to Get Out of
Max out your card and you can spend years simply paying off the interest. The minimum amount you have to pay is often only 1% more than the amount of interest you are paying. You are always against the clock when paying back your credit card.
Late Fees Are Often Very High and Strict
Miss a payment and they will slap on a high fee. Some will add on a fee every day, and many will charge you interest on the amounts you have overdrawn.
Missing Credit Card Payments Is Viewed as Worse Than Missing Loan Payments
This is not true in all cases, but there is a belief that credit card debt is a big cause of bankruptcies (I cannot verify its verisimilitude, but it sound plausible). It is therefore understandable that lenders may view the missing of credit card payments as worse than the missing of loan repayments.
Credit Card Withdrawals Often Cost Money at ATM Machines
The machine itself may charge you a fee for using your credit card, and your credit card issuer will almost certainly charge you a fee for using ATM machines and for any action that it considers to be a cash advance.
Personal Loans Are Worse Than Credit Cards
Some have very high interest rates, and others may trick you into thinking those tiny monthly repayments are doing your life, your finances and/or your budgets any good. Credit card debt is tough to get out of, but getting out of personal loan debt may take years and years.
People With Poor Credit May Have Terrible APR Rates
APR rates (annual percentage rates – aka interest rates) are usually lower with personal loans, but this is not the case for people with bad credit. I always knew that bad-credit APR rates could be bad, but I never realized how bad until last year. * (story at end of article to explain)
It’s Very Difficult to Get Bank Personal Loans Without a Good Credit Rating
People with a poor credit rating could probably use a nice low-interest personal loan to consolidate their debts, and they are denied them because of their poor credit rating.
Part Payments Are Rarely Allowed
A credit card only asks that you pay the minimum amount, which is usually the cost of the interest, but personal loans ask that you pay each agreed installment in full. You cannot pay a little less in return for extending the length of the loan.
You Cannot Pay It Off Quicker and Save on Interest
With a credit card, you are able to pay down the balance quicker and save yourself a lot of interest. With many personal loans, the interest is already added at the beginning, so paying it off early doesn’t save you any interest payments.
Stashing Money Away With a Personal Loan Is Very Dumb
You may put away your credit card for a rainy day and know that it is there when you need it. You can do that with money you have borrowed, but it is pretty dumb.
Higher Levels of Credit May Quickly Land People in Years of Debt
Your first credit card with a new company may allow for a $1200 credit limit. Your first personal loan with your bank or another company may offer between $8000 and $15,000, which is significantly more debt.
Longer Repayment Options Land People in Deceptive Amounts of Debt
For example, if you got a loan for $5000 and pay it back in 12 months at $439 per month to repay just $5261. Or, you may opt for a longer repayment term of 300 months and only pay back $44 per month, but the amount you pay back will be over $13,000. Yet, when applying, the $44 monthly repayment option is very tempting to the point of being deceptively attractive.
Unused Credit Is a Moot Point With Personal Loans
If you have a credit card with a $5000 limit and you have only spent $900, then the $4100 of unused credit will improve your credit score. That doesn’t happen with personal loans. Credit utilization is not a personal loan bonus.
Credit Cards Allow You to Spend Just a Little Whereas Personal Loans Do Not
Obviously, if you get a personal loan and do not spend it, then that is your business, but you will still be charged all the interest (in most cases). With a credit card, you can spend a little of the total limit, repay it and never do it again. You do not have to take and use the money up to the credit limit, whereas with a personal loan, you have to take and use all of the money because it is transferred into your checking account.
Credit Cards Have Fraud Protection Where a Bank Balance Doesn’t
Get your loan cash into your checking account and it has no protection besides what your bank offers. Credit cards have fraud and theft protection.
Credit Cards Are Better Than Personal Loans
There are some benefits and rewards that credit cards offer that personal loans simply do not. This is especially true if you like traveling, and if you want better protection from fraud, and better protection when you are buying online and over the phone.
You May Build Up Your Limit Over Time
You may not get a very large credit limit at first, but over time you, and with good behavior, you may earn a larger and larger credit limit.
They Are Easier to Get if You Have a Poor Credit Rating
People with poor credit ratings are sometimes in need of credit, especially in cases where failing to pay will result in more fees, or where lump sum payments offer significant savings. People with poor credit ratings can still get numerous credit cards.
Credit Cards Offer Rewards and Incentives That Personal Loans Do Not
Many credit card companies offer rewards and incentives to try to get people using their credit cards. Many of these rewards may be earned without having to pay extra interest if you are smart with how you handle your money and debt.
Credit Cards Make It Easier to Buy Over the Internet and Over the Phone
Give the company a few details and they will be paid. There are layers of security that sometimes include putting a hold on a payment until the service or item has been delivered. PayPal have installed a similar feature on their system where the funds are not released until the item or service has been delivered.
They Have Protection That Debit and Checking Accounts Do Not
They have an added level of fraud protection where you may be able to get your money back if the people who take your number do something fraudulent with it. With that in mind, people are more willing and able to buy over the Internet and over the phone because of the added layer of security.
Credit Cards Offer a Financial Fallback That Is Quick
Keep a credit card in your wallet or somewhere safe in your house and you always have a bit of spare cash on hand for emergencies. It is not ideal getting into debt, but there are times when people need money and they do not have it to hand. Storing the funds from a personal loan in your house is not so smart.
Pay for Things With Monthly Installments by Paying Your Credit Card
If you see a big-ticket item and the merchant doesn’t allow for monthly payments, you may use your credit card and make monthly payments to that until the balance is repaid. Oddly enough, there are many times when the interest rate on your credit card is far better than the finance deals some companies offer for their goods and services.
They Can Help You Build Your Credit Rating Quickly
Get a credit card, spend some money on it and repay the balance before the end of the next credit cycle. Occasionally repay just some of it and allow them to charge you interest. Your credit card rating will improve if you frequently repay the entire balance of the card.
Earn Travel Rewards, Points and Travel Freebies
As mentioned above, credit cards offer rewards, and a very popular one in the USA is travel rewards and points. They are very common and quite a few airlines encourage them, which is a perk that simply doesn’t exist with personal loans.
Personal Loans Are Better Than Credit Cards
Consolidating debt and buying big-ticket items is something you should probably do with a personal loan. When it comes to planned expenses and clever budgeting, you may do better with a personal loan.
Credit Cards Can Be Used Overseas, but So Can Hard Cash
The selling point that credit cards may be used abroad is valid, but if you have a currency converter, you may turn your personal loan into whichever currency you happen to need.
They Help Round Out Your Credit Rating
If you wish to build your credit rating quickly, it doesn’t hurt to have a personal loan and a credit card. They both have different types of debt and repayment options that show lenders you are capable of handling debt in different forms. Just do not make your personal loan too large unless you can pay it off within a year.
Personal Loans Are Great Debt Consolidation Tools
There is probably no better tool for debt consolidation. You may think that switching to a 0% credit card is a great idea, but there are often hidden fees and hurdles that make balance transferring a bad idea.
It Is Sometimes Quicker to Get Personal Loan Money Than Apply for a Credit Card
If you apply for a credit card, it usually takes within one to two weeks to arrive, but if you have a good relationship with your bank, you may have the money from your personal loan in your checking account by the end of the day.
Personal Loans Do Not Offer a Black Hole of Inescapable Debt
It is very easy to find yourself in horrible debt with credit cards. You may create a situation where your finances are simply not enough to cover your credit card debts and make progressive and positive ground on repaying your debt. You end up stuck in a hole unable to get out, but personal loans are less likely to create this situation because eventually your debt will be repaid if you simply make the installments when required.
Personal Loans Often Require More Planning
More planning often means more thought, and more thought means better and more productive use of the money. It may also force the applicant to reconsider getting into debt. It may force the applicant to think about his or her repayment budget and how realistic it is. Such thought rarely happens when people apply for credit cards.
Credit Cards Tend to Offer Less at First Where Personal Loans Offer More
If you need a few thousand, then you will probably have to apply for a number of credit cards, whereas you need only apply for one personal loan. Unless you have an older credit card that you have increased the limit on, you will probably need two or more credit cards to be able to spend more than three thousand dollars.
The Terms and Conditions on Flexible Loans Are Often More Forgiving
Read the small print of your credit card agreement, and the small print of your personal loan agreement, and you will see how the personal loan agreement is more forgiving, from conditions of repayment to the fees for missing payments.
Late Payments Will Not Incur Such Big Fees
Credit card companies make their money from people who are stuck in debt, and from people who miss payments. It is in a credit card company’s interest to charge a higher fee for missing payments. Though it is beneficial for personal loan issuers to demand high fees for missed payments, it isn’t part of a good long-term plan, which is why many banks do not charge high fees for missing payments; though they are not exactly Cinderella about it when you do miss them.
The Downside of Credit Cards
- People with a poor credit rating are given more opportunity to ruin their credit
- People with poor long-term planning skills will suffer
- Interest rates are often higher than with personal loans
- A feeling of false affluence makes people spend more
- Numerous credit cards with debt will damage your credit card rating
- Credit card debt is very difficult to get out of
- Late fees are often merciless and high
- Missed payments have a very negative effect on your credit score
- You will be charged at ATMs for whatever appears to be a cash advance
Summary of Downsides Of Credit Cards
People with low incomes are able to get them and they suffer the most. People with a poor credit rating are able to get them and they suffer almost as much.
The Downside of Personal Loans
- The APR rates for people with poor credit ratings are terrible
- You need a good credit rating to get a personal with a good interest rate
- Making part payments often comes with fees and credit rating damage
- Paying it off quicker will rarely save you money on interest
- You shouldn’t hide personal loan money away for a rainy day
- Higher levels of debt may land you in serious trouble
- Longer repayment times create smaller and deceptive monthly payments
- There are no (direct) credit utilization benefits with personal loans
- Personal loans do not have the fraud protection that credit cards have
Summary of Downsides Of Personal Loans
Only use personal loans if you have a good analytical and pragmatic mindset because they can make a lot of debt seem like a little bit of debt. In addition, lots of personal loan debt may damage your credit score for years.
Conclusion – Choose the One That Suits Your Circumstances
As I mentioned in the article Personal Loans Vs Credit Cards: Which Should You Use? I prefer personal loans because I had so much troubles as a young man trying to painfully dig myself out of credit card debt. However, the fact is that your circumstances and your money-management skills will determine which you should choose and ergo which is best for your financial future.
*The High APR on Personal Loans Story
Like all of the eCheck staff, I am very affluent (to say the least). We all are, and every method we have used to gain wealth has (and will continue to be laid out) for free on eCheck. We have held nothing back. When our tips say things such as “Don’t buy clothes for 12 months, sell your car and buy a bicycle, and put the saved money on credit card debt,” it is because I and many of the eCheck team have done it to get out of debt. I used public transport as well as my bicycle.
With affluence and hard-earned wealth (swollen fingers, swollen feet, bags-under eyes hard-frickin-earned wealth) comes its share of beggars. My youngest sister’s friend was always super nice to me and always brought up her money troubles whenever she saw me. Last year she told me that a loan from 118118 Money (in the UK where she was living) had an APR of 99.99%. Turns out it was true.
I am not dumb enough to lend people money. You only have to watch a few episode of Judge Judy to learn that lesson, so I bought my sister’s friend’s car off of her for $900, spent a further $350 on repairs for it, gave the neighbor’s kid $20 to wash and valet it, and sold it for a tasty $1726 on eBay. I used the auction function, I gave it a very long description, took plenty of photos, and described every fault, scratch and dent in the description so there were no nasty surprises for the buyer.