Do you need money to buy something that you don't have cash for? Do you need money for an unforeseen expense right now? If so a personal loan or credit card may be the perfect solution to your financial troubles. Both methods of acquiring capital have their pros and cons. Below you can read more on which one makes the most sense for your situation.
Personal Loan:
Cash
Personal loans give you a lump sum of cash. This is great if you're buying something expensive. A personal loan is a good idea if you're buying a vehicle, buying a house or renovating your house. There are instances when you can only pay cash. If you are buying a car or house from a private seller a personal loan from a bank is your best option.
Credit Score
Your credit score plays a crucial part in the terms of your loan. A good credit score means a lower interest rate and a higher loan limit. A bad credit score may not qualify you for a personal loan at all. Even if you do qualify the interest on the loan can be very high and the loan limit low.
Sum of Money
A personal loan is great when you need a big lump of money up front. You can get a personal loan all the way up to $100,000.
Number one benefit
Personal loans give you a large sum of money. With it, you can pay cash for pricey purchases. You can also consolidate smaller loans and reduce the number of open credit lines. Consolidating smaller loans can lower the interest rate you pay on your debts.
Range of Payments
Personal loan repayment can range from 2 years and up to 20 years. A personal loan is an installment loan. That means that you'll have to pay your loan every month with high monthly payouts. Usually $300 or more a month in payment.
Schedule
Personal loans have a fixed date when the loan will must be paid . It can range from 2 to 20 years. This allows you to budget your income around the loan. With a fixed date to pay and a fixed rate it's the most structured type of loan available. You have more control over your finances and income.
Interest Rates
There are two types of personal loans secured and unsecured.
Secured personal loans are loans such as car loans or a mortgage. Secured personal loans have lower interest rates because they have collateral. If you can't pay the loan your car is either repossessed or your house foreclosed.
Unsecured personal loans have higher interest rates because there is no collateral. If you default on the loan the lender loses money.
OfferButton
Credit Card:
Cash
Credit cards have very high interest and limits on the amount of cash that you can withdraw. Most credit cards offer an introductory 0% interest rate, for up to 18 months. This allows you to buy as if you're paying in cash.
Credit Score
A good credit score offers higher loan limits, and better introductory interest rates. Those with a bad credit score can still qualify for a credit card. With lower loan limits and a zero percent introductory interest rate.
Number one benefit
Credit cards are revolving debt. When you pay the balance of a credit card it allows you to reuse that balance again. Many credit cards offer points that can that you can redeem as cash or airline flight miles. They accumulate everything you use your credit card you make a purchase.
Sum of Money
Credit cards are great if you are making a purchase under $15,000. Credit cards have low loan limits. You can't pay for a car or house with a credit card because they are beyond the limits most credit cards offer.
Range of Payments
Credit cards work best if you plan to pay off your debt in under a year. Those with good credit can take advantage of the common 0% introductory interest rate. Monthly payments on a credit card are low with the minimum payment as low as $25.
Schedule
Credit cards don't have a fixed date when you will pay off your debt. With no fixed date to pay off the debt and variable interest rates, it's an structured repayment plan. The longer you wait to pay off the balance the more interest you accumulate. It also makes it hard to budget your finances if you are not paying attention to your monthly payments. There may be months when you overpay and you're left with no liquidity in cash in your bank account.
Interest Rates
Credit cards have high-interest rates. But with good credit, you can qualify for a 0% interest rate up to 18 months. Once the 18 months of the introductory 0% percent interest rate are over the interest rate can vary from 12% to 24%.
Final Thoughts
A personal loan is right for those who are making very expensive purchases, for those who want to consolidate their debt and, for those who need cash. A credit card is right for those who are making inexpensive purchases, and for those that want to pay low monthly payments.
Resources
1. https://www.valuepenguin.com/loans/loan-vs-line-of-credit
2. https://studentloanhero.com/featured/personal-line-credit-vs-personal-loan/
3. https://www.nerdwallet.com/blog/loans/credit-card-personal-loan/
