Personal Loans Versus Credit Cards: What’s the Difference?

When you need funds, you may find yourself debating options—specifically, a personal loan versus a credit card. While both can provide access to money quickly, each has key features that can make one or the other a better choice for your particular situation. Here are some key points that define the difference between a personal loan and a credit card.

Common Terms & Features of Credit Cards

When you open a credit card account, the lender gives you a credit limit—a figure that represents how much debt they will allow you to put on the card. Card spending limits and other restrictions aside, you can generally use that dollar limit however you want. The card issuer, however, establishes certain terms and conditions for the credit card’s use:

• You will receive a monthly bill for any charges you place on the credit card. If you have a credit limit of $2,000 and only charge $30, your bill will only be for the $30 expenditure, for example.
• Monthly bills will indicate both the minimum payment due and your balance. You must make at least the minimum payment by the due date indicated.
• The credit card will have an APR—Annual Percentage Rate—associated with it. This interest rate is typically variable and will apply to any balances that remain after you make your monthly payment.
• If you pay charges off each month for a zero balance, you can avoid the interest you would otherwise have to pay on any balances carried from month to month.
• Being late on payments, failing to make at least minimum payments or exceeding your credit limit can result in penalties like significant increases in your interest rate, fees and negative impacts on your credit report.
• Credit card issuers may offer promotional interest rates for a specific time, cashback offers for certain levels of spending, points, rewards or other incentives. Note that rewards are typically released only once incentive program balances are repaid.

With the above in mind, credit cards can also be a positive tool offering financial flexibility and resource management when you use them strategically. Here are some ways credit cards can boost your financial prowess:

• Building Good Credit: Always paying on time and keeping balances paid off can result in increases in your credit limit and contribute to improving your credit score. In fact, opening a credit card account can be the first step in establishing a personal credit history.
   
• Managing Cash Flow: Sometimes, financial responsibilities or purchases don’t align with your income dates. A promotion or sale period may be a week short, for example, or your car may need service earlier than is convenient. Putting the expense on your credit card gives you additional time to keep cash flow stable.
   
• Tracking Budget Expenses: Using a credit card for expenses you’d be paying regardless—gas for your car, for example, or groceries—provides an easy way to see just how much you’re spending each month and may help you earn perks.
   
• Saving Money With Perks: Credit card issuers offer a wide variety of perks, from point systems to awards for every dollar spent or each time you use the card. Some offer free concierge services or discounts at partner businesses.

In sum, the best use of a credit card is when the card is working for you. Ideally, you’re using it to pay for something that you would be buying whether you have the card or not. You’ll be able to pay off the expenditure on time without accruing interest on carried balances, and you’ll gain additional benefits or perks for using the card appropriately.

Common Terms & Features of Personal Loans

Unlike a credit card, which assumes a rolling balance, personal loans are one lump sum that is typically used to pay for a substantial expenditure all at once (things such as remodels, educational costs or vehicles). When you take out a personal loan, the lender issues a certain amount of money to you—a total figure that represents how much you now owe the lender. The primary concept behind a personal loan is that you’ve borrowed a certain lump sum of money that you must now repay. The lender establishes specific terms and conditions for how you must do that:

• Lenders can issue personal loans as unsecured, secured or co-signed. For the last two options, the lender may require collateral or a co-signer to guarantee repayment of your debt.
• You must repay a personal loan within a set period—24 months, for example, or 60 months.
• The lender will apply interest on the entire loan amount. Interest rates can vary widely according to your credit score and financial history as well as the amounts and terms involved.
• You will pay a monthly bill that represents principal and interest for the entire amount borrowed. Suppose you borrow $12,000, for example, at an interest rate of 10 percent. You’ll make monthly payments covering both principal and interest on that sum for the term of the loan—36 months, for example.
• Most lenders will allow you to make extra payments to pay off your loan sooner without penalty. Be clear, however, whether extra payments will go entirely toward principal or will still be applied to the loan balance as principal and interest.
• Failing to make timely payments can result in financial penalties and fees, seizures of collateral, shifts to co-signer responsibilities and credit problems.

While credit cards offer a usually smaller sum that can be used and repaid and used again, personal loans are a one-and-done deal. You receive the lump sum. You use the funds. You repay over time. Because of this distinction, personal loans often offer great solutions for other financial challenges:

• Consolidating Higher-Interest Debt: If credit card balances and assorted monthly payments have become unmanageable, personal loans may help. They allow lenders to pay off creditors and combine those debts into one lump sum represented by one monthly payment. The interest rate typically is more favorable and fixed for the specific term of the loan.
• Paying for Emergency Large Purchases: You may not want to max out your credit cards or wipe out savings for a high-ticket emergency expenditure. A personal loan may give you the flexibility of keeping unused credit available or savings in reserve while scheduling the debt you must take on with an established payoff date.
• Purchasing Large-Ticket Items That Other Forms of Credit Won’t Cover: You may want to buy a car that a conventional car loan or credit card won’t cover. You may not have enough equity in your home to leverage to make an update or repair through a home equity loan or line of credit. Or you may have educational needs that exceed conventional student loan limits. A personal loan lets you move forward with your plans.
• Establishing Credit: Making timely payments and ultimately satisfying the loan helps to establish a positive personal financial history and credit standing.

Overall, personal loans remain a valuable financial borrowing choice when other options simply won’t work. In addition, they typically offer fixed interest rates, structured monthly payments and an established payoff date, which many borrowers find helpful.

Find What Works for You

At La Cap, we offer personal loans with generous terms and competitive rates as well as credit cards that will help you live life on your terms with all the perks. If you’d like to learn more about your credit card or signature loan borrowing options, take a look at our website or reach out with a phone call, online message or visit. There is a difference between a personal loan and a credit card, and our team has the financial options to help you find the route that works best.

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