Personal Loans vs. Credit Cards
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Difference Between Personal Loans And Credit Cards
Personal loans are a form of installment loans that are designed to help consumers spread out the cost of a major expense over time. Installment loans require repayment over a set period of time known as a loan term, that typically varies from anywhere between 1 year to 12 years for a personal loan. Most personal loans carry a fixed interest rate as opposed to a variable rate. Credit cards are a type of revolving credit that allows consumers ongoing access to a limited pool of funds that can be borrowed against repeatedly. As long as the balance is paid off, borrowers can continue spending and making purchases up to the credit limit over and over again.
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Learn More About Personal Loans vs. Credit Cards
Both personal loans and credit cards allow consumers unrestricted access to spend funds in any way that they want to. This is in contrast to other forms of financing such as mortgages and car loans where funds are earmarked for a specific purpose. If you are using a credit card the payee will need to accept credit cards and in particular the brand of credit card you wish to use.
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How do personal loans work?Personal loans are a form of installment loans that are designed to help consumers spread out the cost of a major expense over time. Installment loans require repayment over a set period of time known as a loan term, that typically varies from anywhere between 1 year to 12 years for a personal loan. Most personal loans carry a fixed interest rate as opposed to a variable rate.
How do credit cards work?Credit cards are a type of revolving credit that allows consumers ongoing access to a limited pool of funds that can be borrowed against repeatedly. As long as the balance is paid off, borrowers can continue spending and making purchases up to the credit limit over and over again. Credit cards also give consumers the option of withdrawing cash in the form of a cash advance. Accountholders may be subject to a variable rate or a fixed rate, and in some cases benefit from a promotional period with no interest rate at all.
What are the similarities between personal loans and credit cards?Both personal loans and credit cards allow consumers unrestricted access to spend funds in any way that they want to. This is in contrast to other forms of financing such as mortgages and car loans where funds are earmarked for a specific purpose. If you are using a credit card the payee will need to accept credit cards and in particular the brand of credit card you wish to use.
Both types of financing can be applied for relatively easily and funds can be received quickly – sometimes even within a few hours or days, although funding times may vary. They can be applied for online or in person through a bank, credit union, or online lender.
In summary, the similarities between personal loans and credit cards include:
Fast and easy access to funds
Easy application process
What are the differences between personal loans and credit cards?While there are several similarities between personal loans and credit cards, there are also several differences as well.
The basic structure of a personal loan is set up completely differently from that of a credit card. Personal loans work on a predetermined payment arrangement that is made up of equal monthly installments, while credit cards have a variable payment that is based on the current balance. The funds received from a personal loan can only be used once, and consumers cannot spend above that amount, whereas the access to funds on a credit card is ongoing, meaning that as consumers pay off the balance, they can still spend repeatedly up to the credit limit.
While credit cards have revolving access to credit, personal loans tend to have much higher thresholds for financing with loan amounts of up to $100,000. On the other hand, the average credit card limit is just over $30,000. Personal loans also tend to have lower interest rates but higher fees than credit cards.
Lastly, credit cards carry the risk of overspending, while taking out a personal loan removes this temptation.
In summary, the differences between personal loans and credit cards include:
Personal loans usually have higher loan amounts
Personal loans have fixed repayment schedules
Personal loans have fixed loan amounts
Credit cards are revolving
Credit cards can expire, but do not have a loan term
When is it better to use a personal loan rather than a credit card?If you need one-time funding for a large expense that is going to take you a long time to repay, a personal loan is typically a better option than a credit card. You can save money with the lower interest rate of a personal loan while removing the ability to spend funds repeatedly.
If you have poor credit, you may benefit from using a personal loan rather than a credit card due to the ability to take out a secured loan or even use a cosigner. On the other hand, credit cards do not typically allow consumers to use a cosigner and will simply charge higher interest rates for those with poor credit. And while there are options for secured credit cards, they typically have low credit limits, and you must put down an equal amount of deposit in cash in order to open your card.
What are the advantages of personal loans compared to credit cards?When trying to decide between a personal loan and a credit card, there are a few advantages to personal loans to keep in mind.
Personal loans typically provide consumers with a much lower interest rate than a credit card would. In addition, interest rates are typically fixed while credit card rates can be variable and rise significantly over time.
Taking out a personal loan gives you one lump sum payment deposited to your account as opposed to giving you open access to a revolving line of credit. This removes the temptation or ability to overspend by charging new purchases repeatedly even as you pay your debt off.
What are the disadvantages of personal loans compared to credit cards?When compared to credit cards, personal loans offer a few disadvantages. If you need access to ongoing funds, a personal loan falls short. Once the money is spent, it is gone. Personal loans are also typically harder to qualify for than credit cards, may take longer to pay off, and do not come with any perks or rewards programs.
When is it better to use a credit card rather than a personal loan?There are a few instances where it may make more sense to use a credit card than a personal loan. In general, the rule of thumb is that it is best to use a credit card for smaller purchases that can be paid off quickly (avoiding interest) and a personal loan for larger expenses that will take more time to pay off.
While both credit cards and personal loans allow the borrower to spend money however they wish without restrictions, there is more flexibility with a credit card versus a personal loan. Using a credit card provides consumers with access to a revolving source of funds that can be used for an ongoing project or a series of smaller needs. On the other hand, personal loans give you a lump sum of cash that can be spent within minutes yet take years to pay off.
What are the advantages of credit cards compared to personal loans?While credit cards can get a bad reputation, they have several advantages when compared to other types of financing such as personal loans.
One major advantage of credit cards when compared to personal loans is that the monthly debt obligation of a credit card is typically much more manageable than that of a loan. Personal loans are a form of installment loan, meaning that the total amount borrowed is financed out over a series of equal monthly payments over a set loan term. This can result in relatively large monthly payments with no flexibility. With a credit card, monthly payments tend to be smaller, and can change over time as your balance is paid down.
Credit cards may also have a cheaper upfront cost than personal loans which can come with a variety of fees and charges like origination fees. In addition, credit cards tend to be easier to apply for than other types of financing, and in some cases a decision can be reached within minutes.
Lastly, credit cards often come with a variety of perks and programs for consumers to take advantage of, such as purchase protection and cash back rewards.
What are the disadvantages of credit cards compared to personal loans?There are a few major disadvantages of credit cards when compared to personal loans.
The first drawback of credit cards is that they tend to carry a higher interest rate than loans. This is especially true for cards with variable interest rates that are subject to rate fluctuations over time. On the other hand, personal loans typically carry a fixed interest rate that is lower.
In addition, credit cards may pose too big of a financial risk for those who are not skilled at money management. Having open access to a revolving line of credit is simply too troublesome for some consumers who cannot resist the temptation to overcharge and overspend.
What are the different types of personal loans?Personal loans give consumers a way to spend money without any restrictions or oversight into how the money is spent compared to other types of financing such as auto loans or student loans. While you may see personal loans marketed a few different ways, there are really only 2 major types of personal loans: secured and unsecured.
Secured personal loans require an asset to be used as collateral against loan. In the event that the loan is not repaid, the lender can then seize that asset. Typically, secured personal loans require either a savings account, CD, or vehicle title to originate the loan. They are designed to provide access to credit to those who have not yet established a credit history or who have a poor credit score. Those with a good credit score should not need to use a secured loan.
Unsecured personal loans make up the majority of personal loan originations and do not require any kind of collateral or deposit in order to receive your funds. Various forms of personal loans marketed as debt consolidation loans, home improvement loans, and more are really just a type of unsecured personal loan. In reality, there is typically no oversight of how these funds are spent either.
Personal loan amounts can range anywhere from $1,000 to $100,000 with loan terms anywhere from 1 year to 12 years to fit a variety of consumer needs and financial situations.
What are the different types of credit cards?There are a few basic different types of credit cards. One major distinction is the difference between secured and unsecured credit cards. Secured cards require a major asset of some kind to be used as collateral in the event of non-repayment of the card balance. With a secured card, this typically involves a deposit that is returned at the time of account closure. Unsecured credit cards are much more common and do not require any kind of collateral to open an account.
In addition, you may see credit cards marketed towards a variety of specific needs and purposes such as travel cards, rewards cards, cash back cards, balance transfer cards, student cards, credit builder cards, business cards, store cards and more.
Lastly, there are 4 different major credit card networks: Visa, Mastercard, American Express and Discover. Most cards fall within 1 of these 4 networks unless they are a store credit card.
Is it easier to get a personal loan or credit card?In general, it is easier to get a credit card than it is to get approved for a personal loan. The application process for a credit card is less strenuous, and in some cases, approval can arrive within minutes. Additionally, the requirements for a credit card are typically more relaxed than that of a personal loan which must go through an underwriting process before loan approval.
What do you need a better credit score for: personal loan or credit card?While you may need a good credit score to qualify for any type of financing, some financial products have more stringent requirements than others.
For example, minimum credit scores to qualify for a personal loan will vary depending on the lender, but to get access to the lowest rates and best chances of approval, borrowers are expected to have a credit score of 670 or above. A FICO score of 670 or higher is considered “good” while a FICO score of 740 and above is considered “very good”. Most lenders will approve borrowers for a personal loan with a score of 670 and above.
In contrast, credit cards typically do not have a minimum credit score threshold. In addition, there are cards out there for nearly every type of financial situation including students and those who are just beginning to build their credit. Although these cards may not have the best terms and rates, they offer a way for all consumers to have access to a line of credit. As a last resort, borrowers with no credit history or a very low credit score can apply for a secured credit card to help them increase their score.
Which is better for debt consolidation: personal loan or credit card?Consumers who are looking to consolidate their debts into 1 manageable monthly payment have a few different options for their financing.
Personal loans give the borrower quick and easy access to a large lump sum of cash that can be used for whatever needs the borrower has, including paying off debts.
With a credit card, consumers may be able to find a deal with zero interest promotional offer on balance transfers.
So which option is better? Since personal loans typically have better interest rates and higher lending limits, they may be the best option for getting out of credit card debt. Additionally, opening another credit card to help pay off other cards does not remove the temptation to overspend in the first place. There is no guarantee that the borrower will not then turn around and rack up more debt on the new card after the old debts are paid. With a personal loan, the debt must be repaid in equal monthly installments that make debt consolidation a breeze.
What are other types of borrowing?Personal loans and credit cards are not the only type of financing that consumers can use for their personal expenses.
Other types of unrestricted borrowing included payday loans, car title loans, home equity loans, and home equity lines of credit. In addition, you can always borrow cash from family or friends.
Lastly, there are other types of financing that can be used for a specific purpose such as auto loans, mortgages, student loans, and business loans.
How do I choose between personal loans and credit cards?In order to choose between a personal loan or a credit card, you will need to evaluate your own personal financial situation as well as the pros and cons of each type of financing.
If you know that you would have trouble paying off a credit card without carrying a balance on it over time, it would be best to avoid them and stick to personal loans. On the other hand, if you need access to revolving credit for multiple expenses over time, a credit card can be a wise financial decision as long as you use it responsibly.
Generally, you will want to use credit cards for smaller purchases that can be paid off quickly and reserve the use of personal loans to larger expenses that can be spread out over time.
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