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Because a credit score is an important indicator for determining a consumer’s creditworthiness when buying a car, those with excellent credit histories tend to have an easier time borrowing money on favorable terms compared to those with lower credit scores. However, industry data shows that high-risk borrowers remain viable candidates for auto loans. In other words, there is no universally defined credit score needed to buy a car.

Read on to learn how your credit score can affect buying a car, plus some tips for purchasing a car with a lower credit score.

What FICO® Score Do Car Dealers Use?

There are a few different scoring models that car dealers may use for determining a customer’s credit score. They may use the FICO Auto Score 10 , an industry-specific model featuring a score range from 250 to 900. The auto industry also may use VantageScore 3.0 or the newer VantageScore 4.0 model, which has a score range from 300 to 850.

No matter which scoring model is used, a bad credit score falls on the lower end of the range and a good credit score sits on the higher end of the range.

Recommended: What is The Difference Between Transunion and Equifax

What Is the Minimum Credit Score To Buy A Car?

There may not necessarily be a minimum credit score required to buy a car. Consumers with deep subprime credit scores from 300 to 500 have obtained financing for new and used vehicles in the second quarter of 2021, according to the credit bureau Experian’s State of the Automotive Finance Market report for that period. Although the percentage of borrowers in this category is very low, this indicates that even those with the lowest credit scores still may have access to auto financing.

Average APR by Credit Score Ranges

Consumers from all credit score categories have obtained auto loans in 2021, but car buyers with excellent credit histories tended to secure the lowest annual percentage rate (APR) financing, according to Experian’s Q2 report. When assessing what is a good credit score to buy a car, Experian’s data confirms that consumers in the super prime and prime categories obtain the lowest interest rates on average for financing.

Quarterly financing data on new vehicle purchases in the second quarter of 2021 shows the following average APRs by credit score ranges:

•  Deep subprime (300-500): 14.59%

•  Subprime (501-600): 11.03%

•  Near prime (601-660): 6.61%

•  Prime (661-780): 3.48%

•  Super prime (781-850): 2.34%

How to Buy a Car With a Lower Credit Score

Obtaining a loan to purchase a new or used vehicle when you don’t have great credit can be cumbersome, but it’s not impossible. Here are some ways a consumer with poor credit may be able to obtain auto financing:

Make a Large Down Payment

Offering a large down payment on a vehicle purchase may allow car buyers to obtain more reasonable rates and better terms for financing, resulting in more affordable monthly loan payments. By putting more money down at the time of purchase, lenders also may view the loan as less risky, thus increasing your odds of approval.

Get Cosigner Assistance

Buying a car with the assistance of a cosigner is another way to potentially bolster your chance of securing favorable financing. A cosigner agrees to share the responsibility of repaying the loan, effectively promising the lender that if you don’t make the payments they will. If the cosigner is creditworthy, it puts the buyer in a much better position to obtain financing than going it solo.

Consider a Less Expensive Car

Especially if you are buying a car with bad credit, it is important to know how much you can realistically afford to spend — and then stick to that budget, even if the dealer tries to upsell you. Additionally, finding a less costly car will reduce the amount you need to borrow, and it may be easier to get approved for a smaller loan amount than a larger one.

Benefits of Good Credit When Buying a Car

The benefit of a good credit score when buying a vehicle is that you may secure lower interest rates compared to consumers with poor credit. Unless a consumer buys a vehicle outright with cash or receives 0% APR financing, the consumer will eventually face monthly principal and interest payments until they’ve paid off the loan balance in full. Auto financing terms may vary in length, with some maturing at 60 months, 72 months or 84 months.

Car loans with a high APR may cause consumers to pay a long-term premium above and beyond the actual sales price of the vehicle.

How to Monitor and Keep Track of Credit Scores

There are a number of ways you can check your credit score, including through your credit company or another financial institution where you have an account, as well as through a credit service or credit scoring website. Contrary to what you may expect, your credit report does not include your credit score, though it does provide valuable information about your credit history and debts, which is why it can still be helpful to read over your credit report before making a major purchase like a car.

Credit scores can fluctuate over time depending upon financial circumstances, and credit score updates occur at least every 45 days. That’s why it’s important to take a look at where your score stands right before you begin the process of car shopping.

Also keep in mind that it’s common for credit inquiries to occur when you’re shopping around to see what auto loan terms you qualify for. While soft inquiries don’t affect your credit score, hard inquiries, such as those that happen when you’re comparing rates for an auto loan, can ding your score. However, most major credit scores will count multiple car loan inquiries made within a certain period of time — typically 14 days — as one inquiry.

What’s Expected in 2023?

Based on the trends outlined in Experian’s Q2 report for 2021, prime borrowers with good credit in 2022 may continue shifting away from used vehicles in favor of new vehicles. Experian’s research also shows that subprime financing remains at near-record lows, with just a fraction of car loans in 2021 going to consumers in the deep subprime risk category. These trends could continue into 2022.

The Takeaway

While it is possible to buy a vehicle with bad credit in 2022, consumers in the subprime or deep subprime risk categories may want to explore ways of improving their credit scores to help secure financing with more favorable terms. As far as what credit score you need to buy a car, any score is potentially sufficient for obtaining financing.

If you want to check your credit or work to improve your score before buying a car, SoFi Insights is a money tracker app that allows you to easily monitor and keep track of your credit score.

Stay on top of your credit score with weekly updates.

Photo credit: iStock/tolgart

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SoFi’s Insights tool offers users the ability to connect both in-house accounts and external accounts using Plaid, Inc’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score provided to you is a Vantage Score® based on TransUnion™ (the “Processing Agent”) data.
¹SoFi’s Insights tool offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc’s service. Vehicle Identification Number is confirmed by LexisNexis and car values are provided by J.D. Power. Auto Tracker is provided on an “as-is, as-available” basis with all faults and defects, with no warranty, express or implied. The values shown on this page are a rough estimate based on your car’s year, make, and model, but don’t take into account things such as your mileage, accident history, or car condition.
Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s
website .
SoFi’s Insights tool offers users the ability to connect both in-house accounts and external accounts using Plaid, Inc’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score provided to you is a Vantage Score® based on TransUnion™ (the “Processing Agent”) data.
*Terms and conditions apply. (Must click on the link to be eligible.) This offer is only available to new SoFi users without existing SoFi accounts. It is non-transferable. One offer per person. To receive the Rewards points offer, you must successfully complete setting up Credit Score Monitoring. Rewards points may only be redeemed into SoFi accounts such as cash in SoFi Checking and Savings or loan balances, Stock Bits, fractional shares and cryptocurrency subject to program terms that may be found here: SoFi Member Rewards Terms and Conditions. SoFi reserves the right to modify or discontinue this offer at any time without notice.
External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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Credit matters when looking to buy a house, car or any other pricey asset. Unless a consumer is flush with cash, the path to home and vehicle ownership may go through a mortgage or a loan. Good credit can provide you with terms and privileges not available to a person with poor credit, including lower interest rates and increased borrowing capacity.

We delve into what constitutes a good credit score and the reasons why it is important to have a good credit score.

Recommended: What Credit Score is Needed to Buy a Car

What’s Considered Good Credit?

Consumers with standard credit scores of 661 or greater are considered to have good credit, because they rank as prime or super prime in terms of their risk assessment. A bad credit score falls on the lower end of the range and a good credit score falls on the higher end of the range.

Many credit scoring models, including the standard FICO® Scores and VantageScore 4.0, measure an individual’s credit risk on a three-digit scale ranging from 300 to 850. The highest risk group are consumers with deep subprime credit scores from 300 to 500, and the lowest risk group are consumers with super prime credit scores from 781 to 850, according to Experian’s State of the Automotive Finance Market report for the second quarter of 2021.

Consumers may build and attain good credit by paying their bills on time, maintaining a mix of accounts and keeping their revolving balances under 30% of credit limits.

Recommended: What is The Difference Between Transunion and Equifax

8 Benefits of Good Credit

Here are the eight core benefits of good credit, which highlight why it is important to have a good credit score:

Benefit #1: Easier Access to Credit

Good credit may provide you with easier access to additional credit. When a consumer applies for a credit card or personal loan, lenders may analyze the consumer’s credit report and credit score to make an informed decision on whether to approve or deny the application. A person with good credit is considered low-risk and therefore has an easier time getting approved for a personal loan compared to high-risk borrowers.

Benefit #2: Lower Interest Rates

Consumers with good credit may qualify for lower interest rates when borrowing money. For example, available financing data for new vehicle purchases in the second quarter of 2021 show consumers in the deep subprime category of bad credit have obtained auto loans with 14.59% interest on average. Meanwhile, consumers in the super prime category of excellent credit secured 2.34% interest rates on average, according to Experian’s quarterly report. That amounts to an over 12 percentage point difference in interest rates.

Benefit #3: Lower Car Insurance Premiums

Many auto insurance companies use credit-based insurance scores to help categorize consumers by risk and determine what premiums they may pay. Under this practice, higher-risk consumers may pay higher auto insurance premiums than lower-risk consumers. In some states, having good credit or improving your credit score may lead to lower auto insurance premiums over time.

Benefit #4: Increased Borrowing Capacity

Consumers with good credit may obtain larger credit limits than those with poor credit. This could translate to greater spending power on a credit card and the ability to make larger purchases on credit. Having good credit also puts you in a better position to apply for and obtain new credit.

A bolstered borrowing capacity is not limited to credit cards either — credit unions and banks may offer personal loans to consumers with good credit. Such loans can help you consolidate debt, finance large purchases or obtain fast cash to weather an unforeseen emergency. Personal loans also may command lower interest rates than credit cards.

Recommended: Does Net Worth Include Home Equity

Benefit #5: Easier to Buy a Home or Car

Good credit can help you buy a house with a good mortgage rate or a car with low financing. Borrowing money to own a home or vehicle may come at a price that includes principal and interest. Consumers with good credit may qualify for 0% annual percentage rate loans for a car, where no APR means no interest or finance charges. Establishing good credit may also improve your likelihood of obtaining a low-APR mortgage, which translates to lower debt repayment obligations.

Automotive consumers had an average credit score of 732 for new vehicle purchases and 665 for used vehicle purchases in the second quarter of 2021, according to Experian’s quarterly report for that period of April through June. This shows the average automotive consumer boasted good credit within the prime category of low risk.

Recommended: Should I Sell My House Now or Wait

Benefit #6: More Apartment Lease Options

Signing a lease to an apartment may require good credit. Landlords who conduct credit checks might deny lease applications if a prospective tenant has bad credit. Or, those with poor credit may have to provide a higher security deposit for rental housing compared with a prospective tenant who boasts good credit. Tenants with good credit also may have more leverage to negotiate for lower rent.

Benefit #7: Helps Satisfy Employment Background Checks

Jobseekers can benefit from good credit, as some employers may consider a person’s credit score when making hiring decisions. A U.S. Department of Housing and Urban Development report released in October 2019 says that a low credit score or credit invisibility is a burden that “can thusly limit housing choice and employment opportunity,” whereas “a good credit score is part of the pathway to self-sufficiency and economic opportunity.” The term “credit invisible” refers to consumers who lack a credit score or credit history.

Benefit #8: Ability to Obtain Security Clearances

Law enforcement officers with good credit could gain privileged access to classified national security information and FBI facilities. Any state or local law enforcement officer seeking a security clearance has to first satisfy a comprehensive background check that includes a review of credit history. The FBI shares secret or top secret information with local law enforcement officers who have obtained security clearances.

Poor credit history would not necessarily disqualify an officer from obtaining a security clearance, but significant credit history issues “may prevent a clearance from being approved,” according to information posted on the FBI’s website .

The Takeaway

Good credit is important for anyone who wishes to borrow money to help finance key purchases. Many consumers rely upon mortgages and loans to buy houses and cars, while many cash-strapped individuals turn to credit cards to buy essential goods and services ranging from food and electricity to water and rent for housing.

The eight benefits of good credit highlighted above showcase why it is critical to pay your bills on time and practice good budgeting. SoFi Insights is a money tracker app that allows you to monitor and keep track of your credit score, among other perks that could assist with financial planning and managing your net worth.

Check out the features SoFi Insights offers to help bolster your financial success.

Photo credit: iStock/AndreyPopov

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SoFi’s Insights tool offers users the ability to connect both in-house accounts and external accounts using Plaid, Inc’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score provided to you is a Vantage Score® based on TransUnion™ (the “Processing Agent”) data.
*Terms and conditions apply. (Must click on the link to be eligible.) This offer is only available to new SoFi users without existing SoFi accounts. It is non-transferable. One offer per person. To receive the Rewards points offer, you must successfully complete setting up Credit Score Monitoring. Rewards points may only be redeemed into SoFi accounts such as cash in SoFi Checking and Savings or loan balances, Stock Bits, fractional shares and cryptocurrency subject to program terms that may be found here: SoFi Member Rewards Terms and Conditions. SoFi reserves the right to modify or discontinue this offer at any time without notice.
Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s
website .
External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
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Identity theft can happen in many forms: bank or credit card fraud, tax-related fraud, government benefits fraud, or phone or utilities fraud, among others. Identity theft can also occur through email or social media, medical services, or online shopping.

And it can happen to anyone, regardless of how old — or young — they are, where they live, or what their occupation or salary is. There are steps that can be taken to reduce the risk of identity theft. Here’s how to report identity theft if you suspect there has been a breach.

Reporting Identity Fraud to the FTC

One facet of the Federal Trade Commission’s (FTC) mission is to protect consumers. The agency is tasked with stopping deceptive or fraudulent practices in the marketplace and developing rules to make the marketplace a safe place in which to do business. There is also an education component to what the FTC does, so that consumers and businesses have the information they need when they think they may have been wronged.

Reporting fraud to the FTC can be done online or by telephone. The official government website for reporting fraud is IdentityTheft.gov . A telephone complaint can be made by calling 1-877-FTC-HELP (1-877-382-4357); TTY: 1-866-653-4261. On the website, the first step to reporting identity theft is choosing the situation that led to the suspected identity theft. From there, the consumer goes through a range of prompts related to the specific situation.

For example, one situation that can be chosen is “Someone has my information or tried to use it, and I’m worried about identity theft.” Then there are questions that follow, narrowing down the specific type of suspected identity theft and creating an FTC Identity Theft Report and a recovery plan, which is a step-by-step list of what to do based on the information that was entered.

Contacting Your Creditors

Quick action when suspected fraud occurs is key to limiting liability for unauthorized charges on a credit account. Calling the credit card issuer as soon as the fraudulent transactions are noticed is a good first step to take. There may be a phone number printed on the back of the card for this purpose. Reviewing several past card statements carefully, identifying all that are suspected fraud, and then writing a follow-up letter to the credit card issuer with these details can also be helpful.

There are federal protections provided to consumers in the case of credit card fraud. A consumer’s liability is limited to the lesser of $50 or the amount of the theft if the actual credit card was used fraudulently. If only the credit card number was used fraudulently, there is no consumer liability.

For debit card or ATM card fraud, the quicker the consumer reports the card loss, the less they are potentially liable for. A consumer is not liable for any amount if they report a missing debit or ATM card before any unauthorized charges are made. The amounts increase the longer the missing card goes unreported.

•   Maximum loss is $50 if the card is reported within two business days of the loss or theft.

•   Maximum loss is $500 if the loss or theft is reported more than two business days, but less than 60 calendar days after the account statement is sent to the account holder.

•   If the loss is reported more than 60 calendar days after the statement is sent, the account holder can be responsible for all the money taken from their account. The maximum loss can be more than the account balance, if money from linked accounts was also stolen.

If the debit or ATM card number, but not the physical card, was used to make unauthorized charges, the account holder is not liable for those charges if the fraud is reported within 60 days of the account statement being sent.

Consider Filing a Police Report

There are some circumstances in which knowing how to file a police report for identity theft might be useful. If the victim of identity theft knows who was responsible for the fraudulent activity, or they can provide evidence for an investigation, a police report might be warranted. Filing a police report might be necessary if a creditor requires the report as part of its investigation.

Disputing Errors Caused by Identity Theft

Sending a follow-up letter to a credit card issuer after a phone call reporting suspected fraudulent activity is a good way to make a formal dispute of any charges that were unauthorized. Include copies of any receipts that will back up the claim of fraudulent use of the account, keeping original receipts and a copy of the dispute letter.

This letter should be sent to the address provided for billing inquiries, which is usually different from the address payments are sent to, and should be sent so that the creditor receives it within 60 days after the first bill with the error reached the account holder. It’s a good idea to send such a letter by certified mail, asking for a return receipt providing proof of what the creditor received. The FTC provides a sample dispute letter on its website.

Notifying Credit Bureaus

Each of the three credit bureaus, Experian, TransUnion, and Equifax, can place a fraud alert on a consumer’s credit report if they are notified of the suspected fraud or identity theft. Contacting just one of the credit bureaus is fine — that bureau will contact the other two automatically.

Requesting to freeze or lock a credit report can be done by contacting each credit bureau and putting in a request. Putting a freeze on a credit report blocks all access to the report, making it more difficult for a bad actor to use information fraudulently. Credit freezes are regulated by state laws, and credit bureaus are required to offer credit freezes at no charge. A credit lock also acts to protect a consumer’s financial information from potential identity thieves, but is a program offered by an individual company, which may charge a monthly fee for the service. Credit locks are not regulated by state laws.

If errors show up on a credit report, the consumer can contact that credit bureau to file a dispute to their credit report. All three major credit bureaus provide information on their websites for filing a dispute. It can take up to 30 days for the results of any investigation to be available to the account holder.

Federal law allows consumers to request a credit report at no charge from each of the three credit bureaus annually. A helpful way to check a credit report more than just once a year is to request a free report every four months, alternating credit bureaus each time.

The Takeaway

Keeping credit accounts secure is a recommended practice. And using two-factor or multi-factor authentication can keep an account more secure by requiring two pieces of information that only the account holder should know. If you receive a notification from a creditor of a failed login attempt, it’s a good idea to change your password.

If you’re looking for a personal loan, but are hesitant to share your information, know that SoFi takes the privacy and security of its members’ financial and personal information very seriously. SoFi personal loans are handled with the same security measures as all other SoFi products. And checking your rate won’t affect your credit.^*

Find your rate for a SoFi Personal Loan.

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^*Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
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External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
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What are the main differences between personal loans and credit cards?

For a lot of people, using credit cards is the go-to method to build their credit history or when paying for just about anything. From groceries and gas to plane tickets and large electronics, using a credit card can be a hassle-free way to manage expenses. Plus, many cards offer rewards and perks. As long as the borrower is able to pay the balance in full each month to avoid paying high interest rates, credit cards can be convenient.

Personal loans can be another option for acquiring cash up front for big purchases that a person may not have the cash on hand to pay for. Personal loans are closed-end installment loans, versus the revolving, open-end nature of credit card debt, and repaying them is a different process.

Here’s a closer look at personal loans and credit cards.

Personal Loans, Defined

Personal loans are, generally, unsecured loans that can be used for nearly any purpose. The borrower receives the loan amount in a lump sum and is then required to make fixed monthly payments, typically for a term of two to five years — sometimes longer.

Whatever length the loan term is, the borrower makes regular monthly payments on the loan with the intent of paying it off by the end of the loan term. However, the balance may be paid off early, hopefully without paying a penalty. It’s a good idea to check with the lender to make sure the loan doesn’t have a prepayment penalty.

Unsecured personal loans often offer fixed interest rates over the life of the loan. Variable rate personal loans are also an option, their interest rates changing based on market fluctuations. People paying off a personal loan over a longer term may not want to risk a variable rate loan because it’s hard to predict whether or not the interest rate will rise.

Reputable lenders can be found online or in person. The applicant will likely have to provide personal and employment information, possibly including proof of income such as a Form W-2 from an employer, among other requirements that will vary from lender to lender.

After the application is complete, the lender reviews the application and decides whether or not to grant the loan.

If the applicant is approved and agrees to the terms of the loan, they may sign a promissory note, and receive the lump sum loan amount. After that point, they’ll be required to make payments on the loan.

Recommended: Secured vs. Unsecured Loans: How Do They Differ?

Key Differences: Credit Card vs Personal Loan

While both credit cards and personal loans offer a borrower access to funds that they promise to pay back later, there are some key differences that may have major financial ramifications for borrowers down the line.

A borrower requests a set amount of money with an unsecured personal loan, and chooses a set term to pay it back, whereas a credit card gives borrowers access to a line of credit that can be borrowed from as needed (up to the credit limit). This may seem like a positive, flexible benefit, but it can lead to a debt spiral if not managed responsibly.

Credit card debt is revolving debt, meaning the borrower can continuously borrow up to their credit limit without paying the full balance back before borrowing again. When carrying a balance on a credit card each month, a borrower could become stuck paying a high interest rate on the revolving debt.

Personal loans, on the other hand, offer the borrower a lump sum amount and they agree to make regular installment payments of the same amount each month over a set period of time. That means the borrower knows exactly how much they owe — both on a monthly basis and in total—when the loan is signed. The loan principal can’t be increased by swiping a card; a second loan would need to be taken out to have additional funds. For this reason, a personal loan debt may be easier to manage than credit card debt for some people.

One of the ways in which personal loans and credit cards are similar is that both financing options are actually unsecured, and as such tend to come with higher interest rates than secured loans, like a HELOC.

Like mortgages, home equity lines of credit (HELOC), or auto loans, secured personal loans tend to have a lower interest rate because they’re tied to an asset that the lender can repossess should the borrower be unable to repay the loan. Still, depending on their financial profile, a prospective borrower may be able to find an unsecured personal loan with a lower interest rate than a credit card.

Line of Credit vs Loan

There are also differences between a line of credit and a loan.

A line of credit is an ongoing agreement with a bank allowing a borrower to access funds up to a certain dollar limit at any time during a draw period. A personal line of credit is similar to a credit card, though it’s usually not attached to a little piece of plastic. The borrower can use the funds, repay the amount used, and then borrow them again. Typically, the borrower writes checks directly from the line of credit or has the funds transferred to another account, rather than swiping a card.

This differs from a loan in both amount borrowed and the loan term. While funds accessible via a line of credit can essentially be borrowed up to the credit limit, paid down, and borrowed again back up to the credit limit, the funds available through a loan are only available one time, as a lump sum. The term of a personal loan is also different from that of a line of credit in that it has a definite end date. The term of a personal line of credit is open-ended, but can be closed by the lender or at the request of the borrower.

Consolidating Debt? Personal Loan vs Credit Card

Although it may seem counterintuitive to take on additional debt when already contending with existing debt, sometimes it can actually be a smart money move. Debt consolidation is a common reason borrowers take out personal loans, and it’s also possible to consolidate debt with a credit card balance transfer.

Again, these two approaches have some basic commonalities, but work pretty differently when looked at closely — and those differences can have a major impact on a person’s financial wellness over time.

Using a Credit Card to Consolidate Debt

Credit card refinancing generally works by opening a new credit card with a high enough limit to cover whatever balance you already have. Some credit cards offer a 0% interest rate on a temporary, promotional basis — perhaps for the first year or two of holding the card.

This can be a great opportunity to save money on interest by paying off the debt before the promotional time period ends. However, if the balance is not paid in full before the promotional period ends, the borrower will be charged the card’s set interest rate for regular purchases, which is currently averaging more than 16% APR, on any remaining balance.

Additionally, these types of balance transfers often come with an associated balance transfer fee that could be up to 5% of the total being transferred, which could lower the total potential savings.

Using a Personal Loan to Consolidate Debt

Taking out a debt consolidation loan works a little differently. A loan is taken out for an amount that will cover the borrower’s existing debts, likely simplifying their repayment strategy (repaying just one debt instead of multiple credit card balances) while also potentially costing less in interest, depending on the borrower’s existing credit card rates and the rate of the new loan.

When consolidating debt with a fixed-rate personal loan, the borrower will know exactly how much they’ll owe each month, which can make it much easier to keep up with their monthly payments. Instead of keeping track of multiple due dates, multiple monthly amounts due, and multiple total balances due, there is just one monthly due date, one fixed monthly payment, and one total balance to keep track of.

Both of these approaches have benefits and drawbacks, though credit cards can be riskier than personal loans over the long term — even when they have a 0% promotional interest rate.

Recommended: See how much extra you may be paying with our Credit Card Interest Rate Calculator

Is a Credit Card Ever a Good Option?

If someone only needs access to a few hundred or a few thousand dollars, and if they plan to be able to pay down the balance of the debt completely over the course of just a few months, a credit card might be a good choice.

Personal loans may charge an origination fee which is a one-time fee due at closing (or when you receive the lump sum). The origination fee can be anywhere from 1% to 8% of the total amount of the loan, which can really add up with large amounts borrowed.

In the end, it comes down to a borrower’s personal preferences and diligence. So long as a credit card is used responsibly — paying the balance off in full each and every month — credit cards are a common way to build credit history and have a resource for funds should an urgent need arise (plus, some like that they can get perks like cash-back rewards, too).

When is a Personal Loan a Good Option?

Since personal loans can take a little bit more paperwork and sometimes include an origination fee, they may be a more suitable option for when a borrower needs access to a larger amount of money — several thousand dollars or more. If expenses will put the borrower near the top of their credit card limit, for instance, a personal loan might be worth considering.

Personal loans also may be a more cost-effective option if it will take over a year to repay the amount needed to borrow. Lenders typically offer personal loans at a minimum of $1,000 and up to a maximum of $100,000, depending on a borrower’s credit and financial profile.

Another benefit of a personal loan is fixed terms. When there are concerns about over-spending on a credit card, a personal loan may offer the structure of fixed limits, both on the amount borrowed and repayment time. This can be particularly useful when borrowing money for a project in which there’s a risk of easy over-spending such as furnishing a new house or remodeling.

The Takeaway

Different options work for different people and different financial situations. When deciding whether to use a credit card or personal loan, learning the differences between the two is a good place to start.

SoFi Personal Loans are unsecured, have no origination fees, and offer fixed rates with terms to fit a variety of budgets.

Thinking about taking out a personal loan? SoFi personal loans can help you get out of debt sooner — and potentially save you money along the way compared to high-interest credit card debt.

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