Personal loans are quickly becoming the borrowing option of choice for people who need cash but want a credit card alternative. An analysis from TransUnion found that lenders issued more than $30 billion in personal loans over the first three quarters of 2015, with fintech companies leading the charge. If you need to borrow money to cover a large expense, your credit is good and you're torn between a loan and a credit card, keep reading to learn what makes personal loans the smarter choice. (See also When Are Personal Loans a Good Idea?) 

A Low-Interest Credit Card Alternative

One of the most attractive feature of personal loans is the annual percentage rate (APR). Rates are often lower than you'd pay for a credit card purchase or a cash advance. Online lender SoFi, for example, features personal loans with a fixed APR ranging from 5.95% to 12.99%. Prosper, a marketplace lender that relies on investors to fund loans, also starts out with an APR of 5.99%. 

Compare that to the average credit card APR, which is 12.31% as of May 2016, according to the Federal Reserve. If you were to charge $10,000 at that rate and only pay the minimum of $203 per month, it would take five years and nine months to pay off and cost you $4,000 in interest. Now let's say you take out a $10,000 personal loan at a rate of 5.99% and you make the same $203 payment each month. The loan would be paid off approximately 13 months sooner and the interest would total just under $1,500. In short, you'd save around $2,500. 

Borrow More, Get Faster Approval

Another reason to consider a personal loan instead of a credit card is that you have the potential to borrow a higher amount of money. Prosper allows eligible borrowers to take out loans of up to $35,000 while SoFi lets you borrow as much as $100,000. Unless you're in the ultra-wealthy crowd, you'll be hard-pressed to find a credit card with a limit that high.

If you're using an online lender, it doesn't take long for your loan to be approved and funded. Depending on whom you're getting the loan through, it's possible to have the money deposited electronically into your bank account in just a few days. That's a plus over getting a personal loan through a traditional bank where the approval process can take a week or more. It's also faster than waiting for a credit card to be mailed out if you're opening a new account. (Read How to Apply for a Personal Loan.)

Excellent Credit Snags the Best Loan Terms

While personal loans have plenty of upsides over credit cards, there is a potential hiccup – you'll need a great credit score to qualify for the highest borrowing limits and the lowest interest rates. A survey from Discover Personal Loans released in March 2016 found that 60% of borrowers who took out a personal loan graded themselves as having good or excellent financial health. 

According to TransUnion's data, 52% of all personal loans issued in 2015 were issued to "prime" or "near prime" consumers. "Prime" means that they had a VantageScore 3.0 credit score of 661 to 720 while "near prime" status put them in the 601 to 660 range. It's at these levels that you have the best shot at getting a lower APR. For borrowers below that mark, the APR range is more likely to start in the double-digits. 

​The Bottom Line

There are many reasons to favor a personal loan in lieu of a credit card when you need some flexibility in paying for a major expense. For borrowers, there are two important things to keep in mind. First, know where you stand credit-wise before you apply. Get a copy of your credit reports and look for any negative marks or errors that could be dragging your score down. If your credit utilization ratio is over 30%, for example, paying it down could improve your credit rating.

Next, take the time to shop around for the best deal on a loan. Online lenders may offer very different terms from traditional banks and they're not all alike. Carefully consider the APR, fees and the length of the repayment term associated with a particular loan before signing on the dotted line.



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