Credit cards and personal loans have become parts of our daily lives. The Gen X and the millennials cannot imagine life without installments and monthly loan payments. Therefore, it is common knowledge that when you are in dearth of cash for a purchase, you can borrow money from banks and other financial institutions for the personal expenses or you can use your credit cards to pay for the items and services for the time being. The nature of the purchase determines which method will be less expensive for you and other buyers. In reality, both credit cards and personal loans have their pros and cons. Picking one according to your current financial situation and needs will save you money over the long haul. Let us discuss some specific aspects of each to get a better understanding.
What are personal loans?
Personal loans can be large sums of money that you need to borrow from banks, credit unions, and other FinTech companies. These loans can bear varying interest rates, APRs and predetermined repayment periods. Many times, credits from private companies also come with origination fees and prepayment charges. Personal loans usually come with a higher maximum amount cap, especially if the concept of collateral is involved in the process.
You can now get personal loans from banks, credit unions or online lenders. In case of online lenders, the application process and verification process are faster. There have been instances where the applicant received the loan amount within 48 hours of application with a FinTech company. Just like traditional bank loans, these online personal loans also depend on credit scores, personal finance profiles, and other risk factors. These determine the APR and the preferred payment period.
What are credit cards?
Credit cards are revolving lines of credit that you can use to buy anything! Theoretically, they can last a lifetime. As per the requirements of each credit card company, there is a maximum amount that you can spend/borrow each month, and you need to make monthly payments of at least a pre-determined minimum amount. Many of the credit card companies also require you to spend a minimum amount per year to avoid attracting penalties.
Several credit card companies charge annual fees for service, but you may also enjoy 0% interest periods and no charge balance transfers with certain credit card services. Most credit card companies also reward the customers with shopping points, discounts and other offers on select products and stores. They have several similar competitive offers and reward programs since they have to keep up with the lucrative offers and the security banks offer.
Factors that distinguish personal loans from credit cards
The main difference between the two functionally similar but fundamentally different methods lies in their interest rates. Most of the best personal loans bear lower interest rates. It is true for both secured and unsecured loans from a variety of sources. If you have a respectable credit record and good credit scores (above 680 in most cases), you will find personal loan interest rates ranging from 3% to 39%. Credit cards have garnered a daunting reputation when it comes to bill payment, interest rates, and penalty costs. We have seen a fair share of entrepreneurs and individuals declare bankruptcy due to unmanageable credit card debt. Upon non-payment of credit card bills, you can attract even 79% of interest on pending payment (yes! It has happened before), but that does not make credit cards wrong here. Spending habits kill finances, and credit cards are just tools that make shopping as easy as pressing a button.
As we have stated before, the current financial situation of a borrower will determine which method is better suited. Credit cards may offer 0% interest for the first few days after the purchase. Some credit card companies offer 0% interest in the first six months so that you can enjoy the same benefits as a cash purchase during this period. If you complete your payments within the 0% interest period, you will not have to bear the interests. The trick is to make more than the minimum payment on the balance every month, and soon you will be able to rise above the credit card debts. However, in case of personal loans, you need to start counting the interest from the very day you get the money. Keeping the term of your loan short does make sense, but most lenders charge a pre-payment penalty for closing the line of credit earlier than documented.
Sometimes credit cards make more sense
# Paying monthly bills
So when an “expert” comes to tell you that you should always ring up banks when you are in need of cash, remind them about the perks that credit card companies give to their clients. Due to the widespread reliance on banks, most credit card companies have to offer their customers better services and perks. These companies thrive on customer interest. Therefore, the only way to make the best of any financial situation is by closing the line of credit within the 0% interest period of your respective credit card company. A classic example of using credit card company policies to your benefit is to use plastic to pay your bills. You just use your card to pay your utility and grocery bills, and when the time comes to clear the credit card payments, just transfer the money from your daily expense account. It is indeed as simple to maintain a personal upper limit on an open line of credit.
# Consolidating multiple existing loans
There is another instance when experienced folks prefer credit cards over personal loans. When they have more than a few small and medium debts that they want to collate, they usually opt for credit cards. That is ideal in case you have many small loans that sum up to a few thousand dollars. If you can pay them off in less than 18 months or so, you should surely get your own 0-percent balance transfer credit card. As the name suggests, you can transfer your unpaid dues to this credit card without any added expense. Make sure that the resulting interest on the total amount is much lower than the summation of the interests on the multiple loans. It will help you pay off your pending dues with just one economic payment per month. Debt consolidation loans make sense when debtors transfer their outstanding debt to a single 0% APR credit card.
# Personal loans are the saviors for more significant needs
Personal loans are better suited for more substantial expenses. There are times when repayment takes more than a year. People acquire personal loans for various reasons including home remodeling ventures, and to pay for medical emergencies that health insurance does not cover. Others often opt for personal loans in place of credit card loans because they find the temptation of an open credit limit too dangerous to ignore. Personal loans are easier to manage, especially when you have just one or two lines of credit. However, most of the personal loan providers have a cap on the minimum amount. You might end up with a $1000 loan, even when you needed $800! Better credit scores are the keys to unlocking more substantial loan amounts at friendlier interest rates.
So, which one should you choose?
Claiming one form or credit better than the other may be difficult. Only under certain circumstances do most of the pros and cons apply. Sometimes, you will find the terms of personal loans more economical than that of the credit card companies, but that does not prove that personal loans are universally better than credit cards. The reverse is not true either. Yes! Each American household has a credit card debt of $16000 at an average, and that is quite scary, but that does not mean you have to shy away from a revolving line of credit even when you get better offers.
Whether it is a personal loan or a credit card, you need to think about the lender’s perspective. Banks, FinTech companies, and credit unions lend money to people in need to earn the interest. Therefore, before you sign on the dotted line, think about the terms and conditions mentioned in the loan documents. If necessary, talk to your financial advisor or a FinTech expert about the ways you can leverage the policies to your advantage. During this search, if your credit card company offers you a 0% credit card or your personal loan company forgoes a fraction of their origination fee, do not hesitate to take them up on their offers!
One unique advantage of FinTech is that it offers different perspectives of the same financial situation. If you are unable to judge your best options here, you can take help from the online tools that tell you all you need to know about your ideal choice depending on your unique needs. Browse a little, shop around for the best rates and check which companies can offer you the best loan after you evaluate your possibilities online.