So, you need to borrow money. The question is, where? Yes, you can try borrowing from friends and family. However, it can risk your relationships with them. For a quick influx of cash, your best bet is going with personal loans online or a credit card. In general, your credit card is going to be a better choice if you want a short-term debt, something you plan to pay off within a month. A personal loan is more appropriate if you require a longer repayment plan. Of course, it also depends on the interest rate. The lower, the better naturally. To help you make the right choice, let’s delve a little into how personal loans and credit cards work and when a personal loan will work more in your favor.
How does a credit card work?
Ok, so credit cards. With just a swipe of your card, you can pay for whatever it is you want to buy. No need to have cash on hand, right? Credit cards are incredibly convenient. And you don’t even need to pay the balance in full at the end of the month. Instead, credit card companies give you the option of paying just a minimum amount. However, as enticing as this is, there is a catch. The remaining balance will be charged interest which will accumulate over time. The amount of interest charged to you will depend on your annual percentage rate (APR). A high APR can bury you deep in debt unless you quickly pay off the entire balance. It is for this reason that credit cards are often considered as “revolving debt.”
How does a personal loan work?
Personal loans are typically unsecured loans, though there are also secured ones. With a personal loan, you get a lump sum once you get approval. You will be required to make payments over a specific period of time (i.e. installments), usually between two to five years. These payments will include your principal amount and the interest charged by the lender.
Is one better than the other?
Not really. Credit cards are great because you can apply for it at any time but you don’t need to use it then and there. You can opt to use it only when you need it. Another great benefit to a credit card is that it can be easy to get one even if you only have average credit. Plus, the ability to pay just the minimum amount can be beneficial if things are tight at the moment. Other benefits that come with a credit card include cash and travel rewards. You can even earn points with every swipe of your card. However, this type of loan does have additional charges like over-the-limit fees, late fees, and annual fees. If you need cash (because not everyone accepts credit), then you’ll need to get a cash advance through the card which has a fee and, at times, a higher interest rate.
One of the biggest differences between a credit card and a personal loan is the low-interest rate that comes with the latter. Another difference is the fact that your payments will be fixed. This makes it easier for you to budget payments month-to-month. Your credit card bill will depend on what you’ve spent and how much you need to pay at a minimum. However, unlike a credit card bill, you will need to make payment on your loan each month. Non-payment of a loan may mean defaulting on the loan which can negatively affect your credit. Not only will that mean that your account goes to collections, but it can also make it even harder for you to get a new loan in the future.
So, when is a personal loan the better choice?
Personal loans, as we’ve already mentioned, come with lower interest rates which are definitely better all around. It also provides you with a longer payment period. In short, unless you can get a credit card with a lower interest rate and are able to pay off the balance in full within the month, a personal loan should be your first choice.
That’s not all. Personal loans are better for consolidating debt. This is because not everyone can get a balance transfer credit card with a 0% introductory rate. Plus, even if you do qualify, you’ll be pressed to pay off the entire debt before the 0% rate ends. Some cards even charge you a balance transfer fee, typically 1% to 5%. With a personal loan, you’re more able to budget your money and slowly pay off your debt. Because of the fixed interest rate, you won’t have to worry about fluctuating amounts. Even better, your credit utilization ratio will be better with an installment loan than with a credit card balance.