When you need money, you have two main options – the personal loan or a credit card. Both offer viable options, but sometimes one is better than the other depending on your situation.

Understanding the differences and nuances of each can help you choose whether bank loans or credit cards are the best choice for you.

The Required Payment

One area personal loans and credit cards vary greatly is the required payment.

Installment loans from a bank require a fixed payment for the life of the loan. In other words, you make the same payment each month for a specified term. The amount doesn’t change and it pays down the principal and interest on the loan.

Credit cards have a minimum required payment that barely scratches the surface of the interest owed on the balance let alone the principal. The minimum required payments are lower than what you’d owe on an installment loan in most cases.

How Interest Works

The largest concern is how the interest on credit cards work versus the personal loan. With a credit card, interest accrues on the outstanding balance, which includes any interest that accrued in the prior month. In other words, the interest keeps adding up until you pay the balance in full, but it’s often hard to get it paid off when the interest accrues because credit card interest rates are often so high.

Personal loans accrue a fixed amount of interest. You know exactly how much the loan will cost you over its lifetime if you look at the amortization table. The interest rate remains the same and as long as you make your regular payments on time, the interest doesn’t accumulate on top of other interest as it does with a credit card.

Who Should Choose a Personal Loan?

If you need money and need time to pay it off, a personal loan may be a good option. You can typically find lenders willing to provide terms of 2 – 10 years, just keep in mind the longer your term, the higher the interest rate.

Most lenders do require good or decent credit to qualify for the personal loan, especially if they offer an unsecured loan, which means you don’t need to put up collateral.

Who Should Choose a Credit Card?

If your need for money is short-term and your ability to repay the balance is short as well, a credit card may be the better option. If you know you won’t fall for the minimum payment requirements and will pay off as much as you can each month, you’ll likely pay less over the life of the debt than you would with an installment loan.

Credit cards are great for those that don’t qualify for an installment loan or just want to get the debt paid off quickly.

Choosing between a credit card and personal loan comes down to the reason you need the funds and how fast you can pay the debt off. Ideally, a credit card gets you out of debt faster if you can stay disciplined with the payments. If you can’t afford large payments or don’t trust yourself to stay out of debt, personal loans are the better options.