When Do I Choose A Personal Loan Over Using My Credit Card?

When Do I Choose A Personal Loan Over Using My Credit Card?

Written by Fairstone
Fact-checked by Caitlin Wood
Last Updated May 3, 2021

For this post, we’ve teamed up with our partners at Fairstone

When you need to borrow money to cover an unexpected expense (even if ‘borrowing’ is just on your credit card), you want to consider your borrowing options. Since you probably have a credit card on-hand, it’s easy to make that your quick decision. But when is a credit card not the right choice?  

We asked our friends at Fairstone to investigate a few situations when you might find it more valuable to make payments with a loan rather than your credit card. Here’s what they found:

4 situations when a personal loan makes more sense than a credit card

1) The Payment is Substantial

It’s one thing to use your credit card for minor purchases, which can easily be paid off at your next billing cycle, but it’s another thing altogether if you’re putting hundreds or even thousands of dollars on your credit card. Unless you have the cash on hand to pay off big purchases immediately, leaving a large amount of debt on your credit card can send you into a cycle of unpaid balances. 

An unpaid credit card balance can damage your credit over time. Some people may argue that everything will be fine as long as you’re making minimum payments, but, the longer you let this go on for, the more interest charges will build. 

Not sure why that’s an issue? Read this article on the impact of credit card interest (compound interest) on an unpaid balance.  

2) You’re Already Dealing With Credit Card Debt

On a similar topic, if your credit card balance is already greater than 25% of your credit limit, you’ll want to avoid putting any more debt on there. Having a credit card balance that is greater than 25% of your available credit can have a negative impact on your credit score (whereas balances under 25% can help your credit score). Interested in credit utilization? Click here

3) Come To Think Of It, You’d Like To Get Rid Of Your Credit Card Debt Anyway

On top of providing the funds for a purchase, you can use a personal loan to consolidate and pay off outstanding debts. If you have multiple credit cards or loans with various balances, payment amounts and repayment dates, you may want to consider debt consolidation. Not only will you get the up-front cash you need to make a purchase, but your other debts will be paid off and you’ll have a simplified debt repayment plan – one loan, one payment amount and a payment frequency that works for you. Learn how you can pay off bills faster with a debt consolidation loan.

Another benefit of a personal loan? They are a form of installment debt. Unlike a credit card (which is a type of revolving debt), installment loans have a set repayment term and a set borrowing amount, meaning you know when you’ll be debt-free and exactly how much you’ll be paying back. For comparison, look at your next credit card bill – it should tell you how long it will take to pay off your current balance if you only make minimum payments. Typically, this number is a lot longer than a repayment term on a personal loan. 

4) You Can Get A Better Interest Rate With A Loan

Before putting an expense on your credit card, if you know you’ll be carrying the debt for more than one billing cycle you’ll want to consider interest rates. If you’ve already missed a few payments, the rate on your credit card may have spiked. Unfortunately, a lot of people overlook this subtlety in their credit card agreement. You could get a better rate by opting for a personal loan, especially if you’re a homeowner. 

Want to how much a personal loan may cost you? Visit Fairstone’s no-obligation loan quote to find out how much money you could qualify for, and what your payments might be. If you’re a homeowner, let the Lending Specialist know, and they can offer you a personalized quote for a secured personal loan. 

In Conclusion

A credit card is helpful when you are making all your payments and not carrying outstanding debt, but if you’ve found it tough to fully pay off large credit card balances in the past, it may not be the best financial decision for you. It can be a good option to choose a personal loan when you need money but you don’t want to keep using it for debt again and again; instead, you can focus on repaying the debt, helping to empower yourself as a borrower.

Remember, when you’re thinking about a personal loan or a credit card, consider:

  • The size of the debt
  • The current state of your credit card balance
  • Whether you may want to consolidate debt anyway
  • The interest rate you’re likely to receive

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Fairstone Financial is a leading alternative lender in Canada, they have been helping Canadians since 1923. Their mission is to provide Canadians, with fair to good credit, with an affordable alternative to payday loans.

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