If you need to consolidate high-interest debt or finance a large expense, your options include two forms of credit: personal loans and credit cards.
The best choice for you likely depends on your credit score, how much money you need and how much time you need to repay the debt. Here’s a look at personal loans vs. credit cards, and how to determine the best option.
Personal loans are a good option if you:
- Want to consolidate high-interest debts.
- Need to finance a large expense.
- Have good to excellent credit.
- Can make monthly payments over the loan term.
Interest rates on personal loans generally range from 6% to 36%, and borrowers with good or better credit may qualify for a rate at the low end of that range. Borrowing limits can also be high, up to $100,000 for the most qualified borrowers.
A personal loan is an installment loan, which means you get money in a lump sum and make fixed monthly payments over a specific period, usually two to five years. Many online lenders let you pre-qualify for a loan to see estimated rates, with no impact to your credit score.
Low rates, high borrowing amounts and fixed repayment terms make personal loans an option for consolidating debt or financing large expenses, such as home improvements.
The rate you receive on a personal loan largely depends on your credit score. Lenders also assess your credit history, income and debt-to-income ratio. Use the calculator below to see estimated rates and payments based on your credit score.
Credit cards are a good option if you:
- Need to finance smaller expenses.
- Can pay off your balance in full each month.
- Qualify for a 0% promotional offer.
Credit cards can be an expensive form of financing if you don’t pay off the balance each month or qualify for a card with a 0% interest promotion. Credit cards typically have double-digit interest rates, and carrying a high balance can negatively impact your credit score.
A credit card is a revolving form of credit that allows repeated access to funds. Instead of getting a lump sum of cash, your card has a credit limit you can charge up to. Minimum monthly repayment amounts are usually about 2% of your balance, though you can avoid interest charges by paying the full statement balance by the due date.
With higher rates and risks of carrying a high balance, credit cards are best reserved for short-term financing and purchases you can to pay off in full, like daily expenses and monthly bills.
Personal loans vs. credit cards for debt consolidation
Personal loans or credit cards and can be used to consolidate multiple debts to save on interest and get out of debt faster.
When to choose a personal loan: If you have a large amount of debt (more than $15,000) and need more time to pay it off, a debt consolidation loan with fixed payments may be a better approach, but only if you can get a lower rate on the loan than what you pay on your existing debt.
When to choose a balance transfer credit card: If you have a smaller amount of debt (less than $15,000) and good credit, a balance transfer card may be the best choice. It lets you consolidate high-interest debts to a card with a 0% introductory interest rate that can last up to 18 months.
Have a plan to pay off the entire balance before the 0% rate period expires; otherwise, you’ll get hit with interest on your remaining balance as well as retroactive interest on your initial balance.
The savings you net through consolidation should also outweigh balance transfer fees, which typically range between 3% to 5% of the balance, and annual fees.