3 Benefits Personal Loans Offer Over Credit Cards
KEY POINTS
- Personal loans tend to charge less interest than credit cards.
- The interest you pay on a personal loan is also fixed, so your monthly payments are predictable.
- Making payments on a personal loan in a timely manner can help your credit score, whereas carrying credit card debt can hurt it.
Credit cards and personal loans are popular options for borrowing money. TransUnion reports that during the third quarter of 2023, U.S. personal loan balances rose 14.8% from a year prior, while credit card balances rose 15%. So even though consumers owe a lot more money in credit card form than personal loan form -- $995 billion, compared to $241 billion -- it's fair to say that both are pretty common.
If you need to borrow money, you may be wondering whether it pays to take out a personal loan or simply rack up a balance on a credit card you might already have. The latter option may seem easier. But here are some benefits that personal loans offer over credit cards.
1. Lower interest rates
You're not guaranteed to pay a lower interest rate on a personal loan than a credit card. But usually, that's the case. This especially holds true if you're an applicant with strong credit. And the lower the interest rate on your debt, the more affordable your monthly payments might be.
That's important, because if your monthly payments become unmanageable and you fall behind on them, it could seriously damage your credit score. From there, you might have a hard time borrowing money the next time you need to.
2. Fixed monthly payments
The interest rate on credit cards tends to be variable, which means your minimum monthly payments have the potential to increase from one month to the next. That can make credit card payments difficult to work into your budget.
With a personal loan, you're signing on for a fixed interest rate. Your monthly payments will be the same until your loan is paid off in full (assuming you don't refinance that loan, in which case your payments might change, but hopefully for the better in that scenario).
3. Protection from credit score damage
Any time you apply for a new loan or line of credit, a hard inquiry is done on your credit report that typically results in a minor credit score drop. But from there, paying back an installment loan on time every month could give your score a nice boost, since your payment history carries more weight than any other factor when calculating that number.
Credit card debt, on the other hand, has the potential to hurt your credit score, even if you're making your monthly payments on time. That's because another big factor that's part of your credit score is your credit utilization, or the amount of available revolving credit you're using at once.
Once your credit utilization ratio reaches a certain point (usually, when it exceeds 30%), your credit score can sustain damage even if you never miss a payment. With a personal loan, your credit score won't take a hit by you having that loan beyond the minor drop that results from that initial hard inquiry.
All told, it pays to consider a personal loan over a credit card the next time you need to borrow money. You may find that a personal loan is less expensive from an interest rate perspective and a lot less stressful to pay off.
Our Research Expert
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