There are pros and cons of both personal loans and credit cards. Deciding which one is best for you depends on how you plan on using the money you are going to borrow. So, before you apply for a personal loan or start spending on your credit card, take the time to determine which works best for your situation.
When to Use a Personal Loan or a Credit Card
While both a personal loan and a credit card will provide you with the ability to borrow money without collateral, there are different times when you might consider using both of them. Neither are inherently good or bad. They just work best under different circumstances.
Credit cards work well with short-term debt. That means when you go out and make a purchase and plan to pay off the balance in full at the end of the month.
On the other hand, personal loans work well for medium to long-term debt. So, if you don’t plan to pay back the money in a month’s time, you should consider applying for a personal loan instead of using your credit card.
The Pros and Cons of Credit Cards and a Personal Loans
There are some good things and not so good things about both credit cards and personal loans. These include the following.
1.) Interest Rates Cons – Credit cards tend to have much higher interest rates than a personal loan. That’s why if you plan on making a purchase with your credit card, you should really pay it off in full at the end of the month. Otherwise, you will be charged quite a bit of interest.
In addition, even if you make all of your credit card payments on time, your credit card company can change their interest rates. You may find that, down the road, you are paying more in interest than when you began.
2.) Interest Rates Pros – Personal loans usually have much lower interest rates than credit cards. It’s why a lot of people use a personal loan to consolidate their debt and pay off their credit cards.
The interest rate on your personal loan is typically a fixed amount, and it will not change over the course of the loan.
3.) Cash Back Rewards – One advantage of a credit card is that many of them come with cash back rewards. It might only be 1 percent, but some cards offer higher percentages. Either way, it’s always nice to receive money back when you make a purchase. Personal loans don’t have this option.
4.) How you receive your money – With personal loans, you will receive the full loan amount once you have been approved and have finished the paperwork. This can be helpful if you are paying off other debt or remodeling your home or have some other project you need the money for.
Credit cards are what is called revolving credit. While you may have a $5,000 credit limit, for example, the amount of money you have available depends on how much you have already spent and how much you have paid back.
5.) Collateral or no collateral – Credit cards tend to be unsecured which means you do not need to have collateral such as a home or car to secure them. Most personal loans are unsecured as well, and this is generally the best route to go.
There are secured personal loans, but these most often fall into the category of payday loans or car title loans, which you want to stay away from due to their interest rates and lending practices.
Regardless of whether you decide to use a credit card or a personal loan for your cash needs, do make sure it is unsecured.
6.) Loan terms – As long as you make timely payments on your credit card, you can use the available balance on the card. There is no end date. A personal loan, however, has a specific end and beginning date.
Once you have made all the payments, the loan term is over and the debt is satisfied.
In the end, your personal situation will determine which is best for you, a personal loan or a credit card. Having said that, a general rule is that a personal loan is best if you are looking for a loan term that’s longer than a month.
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