If you have ever wonder when personal loans are better than credit cards? Keep reading.
When you find yourself in a position where you need to borrow money, you will most likely be considering a credit card or a personal loan. To decide, you need to know what each of these options is good at.
If you need just a short-term loan and can pay it off in a month, then a credit card could be your best bet. However, if it is going to be long-term, you should consider a personal loan. We will discuss some instances where a personal loan might be better than using a credit card, but first, let’s outline the difference between the two.
The basics of credit cards
A credit card is one of the most expensive options because you typically will have an interest rate in the double digits. And when there is a due date for a credit card payment, you have to pay the minimum, though it is recommended to pay more than that. If you are unable to pay off the credit card entirely, then you will accrue interest which is calculated by the average daily balance during the month rather than the ending balance according to NerdWallet.
A credit card is unsecured, which means there is no collateral. And lastly, there is a limit on how much debt you can have while the amount you can use depends on how much you spend and repay from month to month.
The basics of credit cards
Personal loans can be unsecured or secured and typically have lower interest rates than credit cards. It also differs from a credit card because you get a lump sum of money up front and then you make installment payments over the course of two to five years to pay it back. The payment will include principal and interest.
Instances for taking out a personal loan
If you have an important life event, such as a wedding, then a loan would be better than a credit card. Rather than just charging everything, you can get a lower interest rate and can pay it off over time without the burden of combating a higher interest rate each pay period.
If you are looking to sell your home, then you will probably have to make a few upgrades. Whether that means upgrading your kitchen or updating it with new floors, any sort of major home improvement projects such as this will require a sizable chunk of money. Often times, people may not have this cash readily available.
As such, it may be a good idea to take out a loan to cover it. Again, anything you can’t pay off immediately should not be charged for the high-interest rate of a credit card outweighs its benefits in those instances.
Short-term or long-term finance needs
Sit down and determine if you have the money to pay off what you intend to charge to your credit card. If you are unable too, or you have a small credit line, then a personal line may be your best bet.