Personal loan vs credit card – choose the one that’s right for you
How do you decide when to acquire a personal loan for something, and when to use a credit card?
It’s important to find the right solution for you, because it’s money you’ll be working hard to pay back, and you don’t want to set yourself up to pay more than you need to.
With a personal loan:
- The money is normally given to you in a lump sum
- You make regular fixed payments over the agreed term (time period)
- The repayment period normally extends over two to five years
- There is usually a fixed interest rate
How do personal loans differ from credit cards:
- Credit cards don’t have an end date attached to the repayments.
- Credit cards have a credit limit that you can make use of as often as you like.
- You have the option of paying the entire balance at the end of the month, or ‘carrying over’ your balance and paying small amounts over time.
The trouble with credit cards is that they are very easy to use, you can rack up large amounts of debt easily. Unless you are very disciplined, it is all too easy to keep dipping into the available funds, with the result that you are never out of debt. And having to carry ‘permanent’ interest repayments becomes crippling.
A personal loan is a fixed amount for a specific purpose. You’re not able to draw down more money unless you apply for another loan. A personal loan does not carry the same risk of being stuck in debt and losing ground.
What about securities?
A credit card is unsecured, so their interest rates are much higher than secured personal loans. Personal loans do, however, tend to have lower interest rates than credit cards.
What if you have existing credit card debt?
The Wall Street Journal recommends converting high credit card debt into a personal loan. Not only are you likely to pay a lower interest rate, but your credit score will likely be imported.
Personal loan vs credit card – in conclusion
Use a credit card:
- When you are able to pay back the full amount within 30 days.
Use a personal loan:
- When you require financing over a longer term, from two to five years (or less).
- When you are consolidating credit card debt that would typically take you longer than six months to repay.