If you need to finance certain expenses or even pay off debt, you can choose between either a personal loan or a credit card. However, each option has unique features that could be beneficial depending on your needs. Both personal loans and credit cards can provide you with access to cash that you can use to pay for different levels of expenses, but they work differently.
If you are planning to apply for a credit card or personal loan, it is important to understand the key differences between the two so that you can make an informed decision on which option best suits your needs. Each option has its benefits and pitfalls, and the right option will mostly depend on your current situation and goals. Here is what you need to know about credit cards and personal loans and how to choose the best option.
Understanding Personal Loan
With a personal loan, the bank or credit union will pay you a lump sum amount of money. You are typically required to make payments back in monthly installation and also pay interest. The terms of personal loans usually last at least a few years, and you can also secure this type of loan with collateral like a home.
Before you can get this loan, you will be required to sign a terms agreement that covers the payments you are expected to make, when you are required to pay, late fees, and other terms. If you fail to make your loan payment or don’t abide by the lender’s terms, you will be fined, and it will reflect on your credit score.
Understanding Credit Card
With this, you will get a line of credit that you can use to pay for items. You can get a credit card from either a credit card company or bank. There are two types of credit cards: secured and unsecured credit cards. With secured credit cards, you will need to make a refundable cash deposit, while unsecured credit cards don’t require a deposit.
With credit cards, you will also need to make payments monthly on the balance you are charged. Your lender will also charge you interest for every amount you don’t pay completely, and it will be carried over into the following month’s balance. And this results in a rotating balance, where your balance will be determined by what you didn’t pay off each month.
When and Why Should You Choose a Personal Loan?
Generally, personal loans are more suitable for people that have a huge, one-off expense, such as home improvement products, or if you are trying to merging high-interest debt into a single loan that offers a lower interest rate. One of the major advantages of personal loans is that they offer a lower interest rate and give you time to pay the debt off. These benefits make planning your budget easier, and you know exactly the time it will take you to be out of debt.
In addition, you can use a personal loan for a lot of things. However, if you need money to make a smaller, regular purchase, a personal loan might not be for you. Besides, personal loans don’t offer rewards.
When and Why Should You Choose a Credit Card?
Credits cards are designed for smaller, more regular expenses that you can conveniently pay off quickly. You will only be charged interest if you carry a balance from a month to the other. So, by paying off your loan completely, you are basically getting a short-term loan for free. In fact, if you put all of your expenditure on a rewards card, you will get all of the benefits and won’t have to pay interest.
Many banks and credit card companies also offer a 0% intro APR period on balance transfers or purchases. You can use this to pay off existing debt or save money on new purchases. This is one of the cheapest financing strategies you will find. However, one of the most significant benefits of credit cards (which is easy to buy things easily) is also its pitfall. Because you can easily use a credit card, and this can lead to debt.
As you can see, there is no one-size-fits-all solution when it comes to choosing between a personal loan and credit care. So, before deciding whether a credit card or personal loan is right for you, ensure to explore all of your options. This will help you determine the right option to choose and help you avoid any avoidable fees.