Personal loans are installment loans. Credit cards are revolving accounts. But what does that mean?
Personal Loans are Predictable. Credit Cards are Flexible.
Personal Loans Are More Predictable Than Credit Cards
Personal loans are a type of installment loan in which borrowers receive one lump sum and pay it back in equal increments, or installments, on a monthly basis. The fixed monthly payments make a personal loan more predictable than a credit card, making it easier for some borrowers to budget appropriately. Personal loans also have a definite time period, called a term, during which the total principal and interest are repaid. Terms for personal loans are usually between 12 and 60 months, or 1 to 5 years.
Some personal loans are secured, but most are not. A secured loan is one in which the borrower has to pledge collateral, or a significant possession like a car or other valuable property, to secure the loan. If the borrower fails to repay the loan, the lender can take possession of the collateral. Since personal loans are generally unsecured loans, borrowers are charged late fees if payments are late or missed.
Personal loans typically offer a lower interest rate than credit cards, which makes them a good choice for borrowers who cannot pay a variable credit card balance each month. Plus, the interest on a personal is calculated as simple interest. That means it is calculated once and divided equally over the term of the loan. Origination fees or other lender fees are usually added to the balance of a personal loan at the beginning of the loan term. Although some variables exist, such as the possibility of additional late fees, personal loans are relatively predictable.
Credit Cards Are More Flexible Than Personal Loans
Credit cards, on the other hand, are revolving lines of credit, which means borrowers have ongoing access to funds. Borrowers still have a spending limit, but until that limit is met, they can continue to purchase more goods and services on credit. As with personal loans, borrowers make monthly payments that are based on the amount of credit they used since the last payment. If the balance is paid in full each month, no interest is charged.
Most credit cards are unsecured for borrowers with good to excellent credit scores. Borrowers with less-than-stellar credit history can still obtain credit, but their accounts may be secured with collateral, usually a cash deposit.
Credit cards generally come with higher interest rates than personal loans because of their ease of use and flexible payment options. Interest on credit cards is also calculated as compounding interest. That means that the interest charged is added to the balance each billing cycle, so it can continue to accumulate, or compound, over time. But if the balance is paid in full at the end of every month, no interest will be charged at all. Moreover, some credit cards offer promotional periods of 0% interest. In addition, many credit card companies offer rewards, such as cash back on purchases or points toward airline tickets or other merchandise. Some credit cards do charge annual fees, though, so it is important to compare offers when choosing a credit card.
Personal Loans and Credit Cards Have Pros and Cons.
Both personal loans and credit cards give borrowers access to funds they wouldn’t otherwise have. Both lending institutions and credit card companies rely on borrowers’ credit scores to determine eligibility and interest rates. Both forms of credit can be used to bolster your creditworthiness if used correctly. And they both have advantages and disadvantages to consider before applying.
Personal Loans Are for This. Credit Cards Are for That.
Personal Loans
Personal loans are typically used to cover one-time large expenses or to consolidate high-interest debts.
Cover One-Time Large Expenses
When considering a personal loan, it pays to be wise. Personal loans are intended for expenses that will improve your finances in the long run, like a car repair that is necessary for transportation to and from work or a home improvement project that adds value to your home.
Consolidate High-Interest Debt
Because personal loans usually have a lower interest rate than credit cards, borrowers can consolidate and pay off their high-interest debt. Borrowers who use a personal loan to pay off credit card debt generally resolve their debt in less time and spend less on interest.
Credit Cards
Daily Expenses
Because credit cards are revolving accounts, borrowers have access to funds whenever they need them, making them better for day-to-day expenses.
Most businesses, even some individuals, accept credit cards as a form of payment, so carrying a credit card to pay for everything from gas to groceries is convenient. When you consider perks like cash back or reward points, borrowers are likely to use a credit card for all of their living expenses.
How Do You Decide Which Is Right for You?
Borrowers should consider many factors when deciding whether a personal loan or a credit card is best, including what it’s used for, how it’s repaid, how interest is calculated, fees, and personal accountability.
Do You Need Additional Guidance?
If you need additional guidance to determine if a personal loan or a credit card is best for your unique circumstances, call or come by to speak with a loan officer at AMG Finance.
