Personal loans or Credit Card debt – What is better?

Often times in life we prefer to make our payments preferably through our own hard earned money, however there are times in life where we do need to borrow to make our payments for example; a car, down payment on a house or an important project. Of course you can borrow from your wealthy friends of family but for some of us who don’t have that privilege, we turn to either banks for personal loans or credit card companies for credit. Before you decide which is better, take both into consideration.

Personal loans:

A personal loan is an unsecured loan which you can use for any objective such as vacation, vehicle purchase etc. you apply for the amount of money you desire and the bank uses your history and credit statistics to see if you are a fit candidate or not. Here are some advantages and disadvantages of such loans:

  • Lesser interest: They generally have lower interest rates than on accredit card, so overall, you spend less on paying interest (excluding the introductory APR cards). You interest rate will depend on your credit report.
  • Avoid temptation: Personal loans give you a fixed amount of money so you don’t have the enticing option of more money borrowable unlike the open credit offered by credit cards because you would have to apply for another loan for more money.
  • Gain credit score: Personal loans and credit cards both can help you build your credit score if you are paying responsibly and on time and by using a personal loan to pay a credit card debt, then your credit utilization ratio decreases as well. This only plays well if you keep credit card open and not use it.
  • Fixed interest rate: This keeps your interest payment at the same amount at all period of payments however, keep in mind late payments or any other fees can modify the rate of a fixed interest.
  • Larger payments: Requires higher monthly minimum payments than credit cards.
  • Penalties and fees: certain personal loans charge an origination fees and payment penalties (for paying more than minimum), ask your lender for details about these charges.

Credit cards:

A credit card is an amount of credit from which you are able to borrow money at any time up to the given credit limit. It can be used as often as required and can pay the balance at the end of the month, if not then you have “carrying balance” in which you are still obligated to pay interest on a debt while still having the capacity to make new purchases. Here are its pros and cons:

  • Easy access: To funds and you can borrow effectively with no waiting time or lengthy application procedure.
  • Introductory deals: Many organizations give 0% introductory rates on new cards so if you pay balance within 6-12 months then avoid paying interest.
  • Temptation: Because of the open line of credit, it is hard to resist to borrow money that is in such easy access, so you end up rolling in that cycle of debt.
  • Unfixed interest rates: many credit companies have changeable interest rates ergo, a rate is connected to another interest rate for example; prime rate, which can increase your total interest cost.

All in all personal loans and credit card debt can be used for the better but in different situations, there is no clear winner. A wise choice would be to use personal loans for larger expenses that require longer time to pay it off, as interest rate is higher but allows you to borrow much larger sums of money. Credit cards however, can be used to borrow money for small purchases (few thousand dollars) that can be paid of relatively quickly and with ease within one year as it has lesser amount of interest rate and is easily accessible.

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