Personal Loan or Credit Card: Which is Better?

Category: Finance 29 0

When you need money in a pinch, it often becomes necessary to borrow what you need and pay it back in installments. This can help you recover from emergencies, such as home damage, vehicle failures, medical emergencies, or damages caused by natural disasters. Even after you accept the fact that you must borrow what you need, the question of which method of borrowing remains. The answer to that often depends on your situation.

An Inside Look at Personal Loans

As you examine the options of personal loans versus credit cards, personal loans seem much more attractive at first glance. Banks offer a much lower interest rate on personal loans than the double-digit interest you would pay on a credit card balance. The interest you pay will go even lower, if you have good credit, and increase if your credit is poor.

Repaying the loan is simpler as well because you’ll be paying equal payments over a span of three to five years. This is true whether it’s personal loans through the local bank or quick installment loans taken out online. Those payments will be a combination of the principal balance owed and the applied interest, which means you’ll be paying down your debt with every payment. This makes a personal loan ideal if you plan on taking an extended period to repay the loan.

There’s a Trick to Using Credit Cards

As long as you haven’t maxed out credit credits, you might also be considering this option. Financial consultants and analysts warn about the dangers of abusing credit cards and rightly so, considering how much credit card debt the typical American household has acquired. Most families aren’t quite as high as the $16,000 threshold, but they are running close. Making the situation worse, interest on credit card debt runs especially high, as much as 36% in some cases. This is why you can continuously make on-time payments each month and rarely see your balance drop.

However, before you decide to go the route of borrowing money via a personal loan, there is one saving grace that does make using a credit card more desirable. You will pay zero interest on the first 30 days of your debt, following the purchase. This makes your purchase the same as cash while granting you time to pay off the balance. This varies from personal loans because you begin paying interest with your very first installment.

If you’re going to use a credit card to cover your emergency, be sure you can repay the balance in full within the 30 day grace period. Letting even a portion of that debt remain means you’ll begin paying the higher interest rate and that defeats the advantage of using the card. For this reason, using your credit card should be reserved for smaller expenses or those that you know you can repay within a month. Once your debt begins to accumulate interest, you’ll be heading into a cycle that will have you making payments that are just enough to cover the interest.

Sometimes, the need for cash leaves few opportunities and borrowing what you need is the only way to survive. In those times, you will have to examine your situation closely. In addition to determining how much you need, you should work out a repayment plan that you can reasonably abide. This will help you determine what you can afford to pay back each month and how long it will take you to repay the debt in full. These factors will help you decide whether to choose a personal loan or to use your credit card to cover the expense.

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