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When you Should Choose a Loan Over a Credit Card

No one likes the idea of running out of money, which is why a lot of people turn to financial institutions to borrow cash. Most folks turn to credit card lenders in this matter, while others prefer a personal loan. But which one is better? The answer to this all comes down to why you are getting financing and how long you need to pay it off. Some individuals may apply for a credit card simply because the interest rates are low or the reward benefits are great or may think a credit card would suffice for buying a new vehicle. In these cases, personal loans may have been better options. Read on to learn more about personal loans and how to know when to select a loan over a credit card.

What is a Personal Loan?

Before we go into deciding whether a loan over a credit card is a better option, you should first learn about what personal loans are. Personal loans are unsecured forms of financing that can be used to cover personal expenses, such as a vacation, vehicle or even debt consolidation. A personal loan can easily be compared to an auto loan. You can receive the loan in one lump sum and can then make fixed monthly payments over an agreed period of time. In most cases, personal loans have terms that last between two and five years. The interest can be great if you catch them at the right time, which can be locked in with a fixed rate when you apply. Then to top it off, you wonق€™t have to worry about paying any penalties if you decide to pay the loan off early on.

How Credit Cards Work

Credit cards, on the other hand, donق€™t have a term because itق€™s an endless treadmill of revolving debt. You are given a credit limit, then you have to either pay the complete balance of what you used at the end of the month or carry over the balance and pay interest on it until itق€™s repaid. The great thing about personal loans is that you know when your debt will end and exactly how much you will have to repay.آ Since personal loans are unsecured (which means thereق€™s no collateral for the bank to collect if you default), the interest rates tend to be higher, compared to a secured loan, like a mortgage or auto loan. However, you can typically find them to be lower than credit card interest rates.

When to Use a Personal Loan Over a Credit Card

There are a couple of guidelines you should keep in mind when considering which financing options to pursue for your purchases. For instance, if youق€™re planning on making a purchase that is between a few hundred dollars and a few thousand dollars, and would like to pay off the debt within a couple of months, the cheapest option would be to use a credit card. The reason is because you can apply for a new credit card and receive 0 percent APR for the first 12 to 18 months, which means you pay no interest on this particular purchase (if you were to stick to your commitment to pay off the debt before the promotion ended).آ For purchases that are over $1,000 that youق€™d like to repay over a longer period of time, you may want to opt for a personal loan instead. For example, if you need $2,000 to buy something, but wonق€™t be able to repay it in less than 15 months, a personal loan would be the better option. This also holds true when you need to borrow money that is higher than credit card limits, such as $5,000.

Fees

Keep in mind that there is typically a one-time fee that you have to pay in cash when taking out a personal loan. The origination fee can also change on them, which is typically between one and five percent. If youق€™re lucky, you can find a loan that doesnق€™t have an origination fee at all. So make sure to ask about this when searching for a loan to take out.

Knowing whether to apply for a loan over a credit card can help you to make smarter financial decisions. Use these helpful tips the next time youق€™re planning to make a purchase that requires a bit of financing.