Differences Between Personal Loans and Credit Cards
You already know that credit cards provide revolving credit while personal loans give you access to a lump-sum payout. Besides this primary factor, these forms of credit differ in three significant ways:
Repayment
With credit cards, your repayment depends on your usage. You should pay your statement balance in full by the due date each month to avoid interest. If you are not able to do this, you should pay at least the minimum payment by the due date each month to avoid late fees and higher penalty interest rates until you can pay off the entire balance.
Meanwhile, personal loans offer a fixed repayment schedule through monthly installments. You know beforehand how much your monthly payment will be and how long your repayment term will last.
Funds
When a lender approves your personal loan application, they deposit the payout directly into your account or send you a check. With a credit card, you use the card to access your revolving credit and make purchases whenever necessary.
You can also use your card in an ATM to secure a cash advance, but this should generally be avoided unless perhaps you need cash quickly in an emergency and do not have a better alternative to obtain it, since cash advances usually charge separate fees and higher interest rates and have no grace period for interest charges.
Fees and Interest
Both credit cards and personal loans can charge interest on the amount borrowed. Personal loan interest rates may be lower than credit card APRs, but you can typically avoid credit card interest on purchases by paying off your statement balance in full by the due date each month.
For personal loans, some lenders may charge early payment penalties or origination fees, and you may have to pay late fees if you don’t make your monthly payment on time.
Credit cards may also charge annual fees, late payment fees, returned payment fees, foreign transaction fees, over-limit fees, balance transfer fees, and cash advance fees, depending on how you use your credit card.
When Should I Consider a Personal Loan?
A personal loan could be ideal for when you need to make larger one-time purchases, such as a home repair or other major expense. It may also make high-interest debt consolidation easier if you can secure a loan at a lower interest rate than the average interest rate of your current debts.
Also, since personal loan repayments are pre-planned and monthly payments never change, they’re a good option for anyone seeking structure and predictability in loan repayments.
When Should I Consider a Credit Card?
Credit cards can simplify everyday expenses like groceries and gas. You can use your credit card for larger purchases too, but if you do not pay your statement balance by the due date each month you could incur a large amount of interest on these expenses.
Certain credit cards may also offer rewards such as miles, points or cash back for making purchases on the card.
Choosing the Right Product for Your Situation
Consider why you need your funds. Typically, credit cards are best for small, everyday purchases that you are able to pay off quickly, while personal loans are ideal for bigger expenses.
If your goal is to consolidate debt, closely examine the fees associated with both options. With a balance transfer credit card, consider if the card has a 0% intro APR period on balance transfers. Ask yourself if it is a reasonable timeline for repayment. If you’re leaning toward a loan, calculate the total interest you’ll pay over the loan period and see if the terms are negotiable.
Citi offers personal loans to both existing Citi customers and new Citi customers that meet specific eligibility criteria, including an established credit and income history along with additional factors determined by Citi. If you think you could benefit from a Citi Personal Loan, apply online today.
This article is for general educational purposes. It is not intended to provide financial or tax advice. It also is not intended to describe any Citi product or service. You should refer to the terms and conditions financial institutions provide for various products. Please consult your tax advisor with any tax questions. Citi is not a tax advisor.
