Ask Yourself These Questions to Decide if a Personal Loan or a Credit Card Is the Best Financing Option

If you need to borrow money to fund a purchase over time, credit cards or personal loans are usually the options you consider. Both can be used to buy almost anything you want, from holiday gifts to vacations.

But which one is right for you? To decide if you should use a credit card or a personal loan, here are a few key questions to ask yourself. 

How much do I need to borrow?

The first thing to think about is the amount you need to borrow. With a credit card, you can only charge purchases up to your credit limit. If you have a card with a large credit limit, you may be able to borrow tens of thousands of dollars. But many cards come with lower limits, especially if you're a new customer. You may be limited to charging a few hundred dollars, which might not be enough depending on your borrowing goals.

Personal loan lenders, on the other hand, usually allow you to borrow a lot more than you could charge on a credit card (although eligibility does vary depending on income, existing debt, and credit score). It's not uncommon to find a personal loan lender offering loans of up to $100,000, so if you must borrow a large amount, a personal loan could be a better bet. 

On the other hand, personal loan lenders also have minimum requirements. For example, you might need to borrow at least $1,000 or $5,000. If you need to finance something small, such as charging $50 worth of groceries until payday, a credit card could be a better bet. 

How quickly can I pay off the loan?

The next big consideration is your repayment timeline. Personal loans come with fixed schedules for repayment and you'll usually have a choice of loan terms, such as repaying your loan over two, five, or seven years. Since personal loans have predictable schedules that allow you to pay off your debt over a designated time, you'll know upfront exactly when you'll be debt-free and what total interest costs will be.

Credit cards are different. You usually have to make only a small minimum payment each month. This means you could pay less on your cards each month than your personal loan payment would be. The problem is, the card's high rate and low minimum payment could mean you'll be in debt for decades. If you want a definite payoff date, a personal loan could be best. 

On the other hand, there are 0% APR credit cards that allow you to borrow without paying interest for a set period. If you're confident you could repay your card's full balance prior to the 0% rate expiring, this option could be more affordable than a personal loan. 

How quickly do I need the money?

Finally, consider your timeline for when you need the funds. If you already have a credit card with available credit, you can start charging stuff right away so there will be no delay if you have a truly pressing expense. But you'll have to apply if you want a personal loan.

Many personal loan lenders provide quick -- sometimes almost instant -- decisions on whether you can borrow. And some offer same day funding, but not all do. If you need money immediately, a card may be your best option. But if you can wait a day to get the funds in your checking account, a personal loan could be a potential solution too. 

By asking yourself these questions, you can decide what the best borrowing option is. Once you've made your choice, get the funds you need by applying for a personal loan or using your card -- then get serious about repaying what you've borrowed, so interest costs won't jeopardize your financial goals.