4 Signs a Personal Loan Would Be Better Than a Credit Card for Your Big Purchase

If you have to buy something you can't afford right away, you'll need to borrow for it. And there are a few ways you can do that. Two common options are a personal loan and a credit card.

Deciding between these two methods of borrowing can sometimes be hard, so here are a few key signs to look out for that suggest a personal loan could be the better choice.

1. You know exactly how much you need to borrow upfront

One of the big benefits of a credit card is that you can borrow money over time, as you need it. For example, you can apply for a card and might be given a $5,000 credit limit. But you don't have to borrow $5,000. You could borrow $1,000, pay back some of it, borrow some more, pay back some of that, and on and on as long as you didn't borrow more than $5,000 at any given time.

If your costs are uncertain and will be paid over time, this can give credit cards an edge. For example, if you're taking on a DIY bathroom remodel over time, you could buy the tile, pay it off, buy the vanity, pay it off, and keep going with the project that way.

If you know upfront exactly how much you need, though, and need the money all at once, a personal loan could work for you. You get the funds distributed as a lump sum and start paying interest right away, so these loans are best when you need the funds distributed all at once and require a precise amount. You can't just go back and borrow more with a personal loan without applying for a new loan altogether.

2. You're borrowing a lot of money

When you use a credit card, you get a set limit, such as our $5,000 example above. Most people do not have access to credit cards with $50,000 or $100,000 in available credit (although it is possible for some to have such high limits). But personal loans routinely allow you to borrow these large sums.

If you need a substantial amount of funds, then looking for a personal loan lender that will offer it could be a smarter choice than trying to apply for a credit card that will give you tens of thousands of dollars in credit right away.

3. It's going to take you a year or longer to pay off the purchase

The average credit card interest rate is 21.47% while the average personal loan interest rate is 12.35%.

Some 0% APR cards allow you to borrow for purchases at 0% for a limited time, such as 12 or 15 months. But if you are going to be paying off your debt for a long time, such as a few years, you'll spend a long time paying interest at that high credit card interest rate. A personal loan at a more affordable rate could be a better choice in this situation.

4. You tend to make only the payments required of you

Finally, if you tend to make only the required payment, a personal loan is definitely the best option. Credit card minimum payments are usually only around 1.5% to 2.0% of the amount due. Very little of the money you pay each month actually reduces your balance if you make minimum payments alone, so you could be in debt for an extremely long time.

If you use a personal loan, though, the required monthly payments are designed to allow you to pay off the loan in a set time period such as two, three, five, or seven years. So, you'll know when you'll be debt free and should get there faster just by paying what's mandated.

If you spot these signs that a personal loan is your best option, then start shopping around among the best lenders to find one today that's right for you.