Wallet Lining: a Personal Loan or a Credit Card?
By Top 10 Personal Loans Staff
One of the first steps in building financial security is to get ahead of your paycheck and save for emergencies as well as major purchases. In many cases, you are not at that point and need to use credit for those financial emergencies.
Although credit cards are convenient, a personal loan is often a better option for major purchases. The following provides insight into personal loans versus credit cards as well as the advantages and disadvantages of each option.
Personal Loan vs. Credit Cards
Personal loans are unsecured loans that can be used for almost any need. Personal loans are similar to auto loans for the following reasons:
Fixed interest rates
- Make fixed payments
- No penalty for early pay-off
- Receive the money in a lump sum
- Terms between two and five years
Personal loans are different from credit cards in that there is no end date on debt. Credit cards feature a credit limit that can be used whenever necessary. However, it is required that you pay the entire balance each month or incur fees.
The greatest danger with a credit card is charging more at one time up to the provided credit limit keeping you in debt. On the other hand, with a personal loan, you know the payment schedule and that you cannot borrow more money without a new loan.
However, like a credit card, since personal loans are unsecured, the bank cannot repossess a purchase if you do not make a payment. Therefore, interest rates on personal loans are typically higher than secured loans but lower than credit cards.
When Personal Loans are better than credit cards
For those items that take more time to repay, a personal loan is the best option. For instance, if you need to borrow $1,000 or more and need greater than 15 months to repay the balance, a personal loan may be the best option. The greatest disadvantage is that they may charge a fee of 1 to 5 percent of the total loan. Although this is a one-time fee, it can be significant depending on the terms of the loan. However, not every lender charges an origination fee but it is important to ask when comparing interest rates.
When Credit Cards are better than personal loans
For small purchases, find a 0 percent APR credit card that can be paid off (interest-free) in 12 to 15 months. If you are purchasing an item that ranges in price from several hundred to several thousand dollars, it is best to apply for a new credit card with 0% APR on purchases for 12-18 months. As long as the item is paid off before that period, no interest is paid.
Both options should be considerations when making purchases that you are able to pay back. For smaller purchases, it is usually best to use a credit card. For larger purchases that need to be paid off over time, choose the personal loan.