Life can be expensive. You had an unexpected medical bill pop up. Your car broke down and you need it repaired quickly. The holidays are coming up. Or there’s another inevitable situation where you have more costs than you do money.
When these situations come up, you need money - and fast. Typically, credit cards and personal loans come in clutch to resolve these expenses.
But is one better than the other? Are they even different? If they are, does it matter which one I use?
As with all financial matters, the choice depends on your personal situation and what works better for you.
Keep reading to explore the pros and cons of each type of debt and which one works better for your needs.
Personal Loan Debt
Personal loans, also known as installment loans, give you a lump sum of money that you repay over time. These payments are usually made in fixed monthly payments, typically over a few years.
With a personal loan, you can find lower interest rates than with credit cards, especially if you have good credit. However, there are loan options available if you have a lower credit score, such as with AMG Finance.
You can use a personal loan for any purpose, including home repairs, car payments, vacations, Christmas gifts, and more. More often than not, people use personal loans to consolidate debt.
Personal Loans Are a Good Choice If:
You want fixed monthly payments to make budgeting easier
You need more funds than your available credit limit
You need a lump sum of cash
Credit Card Debt
Rather than giving you a lump sum, credit cards give you access to a revolving line of credit. This means you get ongoing access to funds that you can use when you need (within your credit limit).
When you borrow money with a credit card, you only have to pay back the amount you borrowed. If you pay off your balance each month, you don’t have to pay interest on what you borrowed. However, there can be steep interest rates if you carry over a balance.
Since you’re paying back the amount you borrowed (and any interest accrued with it), your credit card payment can vary each month. You must pay at least the minimum payment each month. But if that’s all you pay, the amount you owe can grow very quickly.
Credit Cards are a good choice if:
You need ongoing access to funds
You want flexible payment options
You want credit card rewards, such as cashback, travel points, etc.
You want interest-free payments when paying back in full
How Does Each Loan Affect My Credit Score?
In addition to giving you different ways to borrow money, each loan type affects your credit score differently.
Credit cards impact your credit score depending on how much you use, known as your utilization ratio. It’s recommended to keep your utilization ratio under 30%, but the lower you can keep it, the higher your credit score.
Personal loans add variety to your credit mix, which is another factor in your credit score.
Regardless of which loan you have, though, late or missed payments can negatively impact your credit score. This can make it more difficult to get credit in the future.
Finding the Right Loan for You
Picking a loan that works for your situation can be daunting. But you don’t have to decide alone.
At AMG Finance, our friendly team is here to recommend the right choices based on your financial situation. We can even help if you have a lower credit score.
Visit one of our branches to get started or learn more about our loan services.