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Personal Loans vs Credit Cards
Getting into debt is easy. Paying it off is much harder. So, before you sign up for a personal loan make sure you know the interest rate, how long it will take to repay the debt, the total cost of the debt, whether you can afford the regular repayments, and the penalty fees for missing a repayment or making early payments. If you’re happy with the answer to all these questions, you will be on the road to managing your personal loan liabilities.
What is a Personal Loan?
A personal acts like an auto loan, for example, with a fixed repayment term, interest rate, and monthly payment. This is different than credit cards, which provide you with a revolving line of credit. The credit card has a maximum credit limit that you can use as much of or as little of as you like, paying the balance in full each month, or paying only the minimum.
Which Option is Best?
Both a personal loan and a credit card can offer an unsecured form of cash when needed most. From a car purchase to a new furnace, cash through a personal loan or credit card may come in particularly handy when cash is needed and money is tight.
Both credit cards have their share of advantages and disadvantages, but which one is right for you?
Big Purchases vs. Small Purchases
Credit cards have the advantage of acting as ‘revolving credit’. What this means is that you are given a spending limit of say $1000 and you are free to spend up to this amount as long as you pay the debt back plus some interest. So a credit card can be useful for paying off small purchases when you don’t have the cash on hand.
The opposite is true for personal loans because they are generally suited to larger purchases like a car. So a personal loan acts like a line of credit that is paid back over a fixed period of time.
When is a Credit Card Better?
If your expense is small enough that you will be able to pay it off quickly, a credit card offering a low or 0% intro APR on purchases is obviously better than a personal loan, as you will pay little or no interest. Although few cards are accepting new applicants in today’s tight credit market, one card that is issuing new accounts and features a 0% APR is the Discover More Card.
One problem with credit cards that’s not immediately apparent is that of ‘easy money,’ where funds are available constantly. This can be problematic for many consumers who have difficulty controlling their spending habits and end up much further in debt than they originally intended. Purchases made with a personal loan, on the other hand, tend to be premeditated, taking away the temptation to spend more than you can afford.
Which Option Is Best?
Between the two we discussed, charge cards are typically the best option for most, simply due to their flexibility. But if you are a homeowner, then it may make sense to do a home equity line of credit. This is a loan against the value of your home. The benefits are that you can borrow a higher amount, and because it’s collateralized, the interest rate is typically less than a credit card.
Your ability to obtain quick cash, either through a credit or personal loan, will vary according to your credit score and your financial needs. It is always important, however, to consider all of your options before taking out any kind of loan or credit line.