Many consumers who need access to quick cash to cover an emergency expense may use their credit card. However, there are many other options to cover an emergency expense or a large purchase, ones with much lower interest rates.
Credit cards can make your purchase or expense more expensive than it needs to be. As such, if you’re looking to cover an unexpected expense or large purchase, consider taking out a personal loan instead.
While personal loans and credit cards are easy enough to understand, both products involve different features, uses, and pros and cons, which is why research is key before you apply. Start with the basics, like learning how personal loans and credit cards work:
A personal loan is a specific amount of money that you can borrow from a lender and must repay (with interest) over several months or years. It’s intended to be used one time, to cover a larger expense, such as a financial emergency. Some lenders offer secured loans, which require collateral, while others provide unsecured loans, which don’t.
A credit card also lets you borrow money, with interest. However, unlike a loan, a credit card is a type of revolving credit. This means you get to withdraw from a specific credit limit, which is the maximum balance that you can carry on your credit card. You must then repay what you borrow on a monthly basis in order to replenish your credit limit.
Applying for a personal loan can involve a bit more paperwork than a credit card. That said, you generally have to be a Canadian resident or citizen and at least the age of majority in your province or territory (18 or 19) to apply for either of these products.
Every lender has different requirements but most will ask for the following documents:
To qualify for a large personal loan with a low rate and flexible term, you usually need:
To apply for a credit card, you must provide these personal and financial details:
Since the terms, interest rates, and conditions are already set, qualifying for a credit card can be slightly easier than it is for a personal loan. Nevertheless, you need to have:
Here’s a quick example to show you how much a personal loan can cost you compared to a credit card in Canada given that you’re making equal payments on both accounts:
| Personal Loan | Credit Card | |
| Loan Amount | $5,000 | $5,000 |
| Interest Rate | 7% | 19.99% |
| Monthly Payment | $154.39 | $154.39 |
| Term | 3 years | 3 years + 11 months (to cover your total balance) |
| Interest Paid | $558.04 | $2,246.37 |
| Total Paid | $5,558.04 | $7,246.37 |
As you can see, a credit card can be more expensive over time due to the high-interest rates involved, especially if you pay your total balance off in installments like you would a personal loan. When possible, it’s best to pay full monthly balances to save on interest.
A personal loan and credit card can affect your credit scores in various ways. Here are a few ways your credit card and personal loan could affect your credit:
Like a personal loan, your credit card can affect your payment history and credit history. However, one factor that credit cards can affect but personal loans do not, is the debt-to-income ratio (aka credit utilization ratio).
Personal loans and credit cards have benefits and drawbacks that can make them good or bad for your financial profile. Make sure to weigh those pros and cons carefully, then add each product to your budget to see which one might work better for your finances.
A personal loan can be a very useful tool but is only a good idea to apply for when:
Similarly, a credit card is only a smart choice (or better than a personal loan) when:
The best way to know whether a personal loan or credit card is suited for your situation is by comparing lenders, interest rates, and terms of the loan. Remember, personal loans and credit cards come with serious financial responsibilities, so it’s important to do research, compare products and get as much advice as possible.
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Bryan is a graduate of Dawson College and Concordia University. He has been writing for Loans Canada for five years, covering all things related to personal finance, and aims to pursue the craft of professional writing for many years to come. In his spare time, he maintains a passion for editing, writing screenplays, staying fit, and travelling the world in search of the coolest sights our planet has to offer.
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