3 Reasons Personal Loans Can Be Better Than Credit Cards

Ideally, when you make purchases, you will use the money in your bank account to do so rather than borrowing. But that is not always possible. Sometimes you need to buy something now that you don't have the cash for.

If that happens, you could use either a personal loan or a credit card to finance your purchase. While there is a place for both, there are some potential reasons why borrowing with a personal loan could be a better option. Here's what they are.

1. You will likely pay a lower interest rate

A personal loan can sometimes come with a lower interest rate than a credit card. In fact, the St. Louis Federal Reserve reported the average credit card interest rate at 20.09% as of February 2023, but reported the personal loan interest rate at 11.48% during that same period.

Obviously, if you have to borrow, it's better to pay 11.48% than nearly double that amount at 20.09%. The lower your interest rate, the lower your borrowing costs will be and the more of each payment will go toward actually reducing the balance due.

2. There are no surprises as to when you'll be free of your debt

There's also no mystery about when you are going to be done paying off your personal loan since personal loans come with a definite payoff term and your monthly payments are set to ensure you pay your debt back on schedule.

Say, for example, you opt for a $5,000 personal loan with a five-year repayment term. If you chose a fixed-rate loan at 11.48%, you would pay $110 per month over the life of the loan, incur total interest costs of $1,594.77, and would be free of your obligations after five year's time.

On the other hand, let's say you charged $5,000 on a credit card at 20.09%, your minimum payment was 2%, and you paid only the minimums so your monthly payment would be lower at around $100 to start with (and slightly declining as your balance declined). You would be paying your debt for 677 months and would incur $22,126.31 in interest charges.

Of course you could pay more than the minimum on your cards. But without the certainty of a set payment and fixed payoff timeline, it can be difficult to determine exactly how much your balance would cost to pay off or when you'd be done doing so.

3. They could be better for your credit score

Finally, a personal loan could be a better option than borrowing a lot on your credit cards if you care about your credit score.

If you charge a lot on your credit cards, this could result in having a high credit utilization ratio (that's the debt you use versus the credit you have available). A high ratio -- above 30% -- hurts your credit score. But if you have a personal loan you pay on time, this can give you a good mix of different credit, which can help improve your score as you show you can reliably pay back installment loans as well as a credit card.

For each of these three reasons, it is worth considering using a personal loan to finance a big purchase rather than charging it. Just take the time to consider what makes sense for your situation so you can pick the financing plan that costs you less and helps you get debt-free the fastest.