Personal loans and credit cards offer an amount to the borrower upfront, which are to be paid back within a short period of time.
In case of emergencies, people can want money immediately, and it isn’t necessary for them to have so much in their savings. Whether it be a medical emergency or an auto repair expense, the money you need can be given to you through a personal loan or a credit card.
But let’s go through the basics first, what these options are, what is the difference between the two and which one is better for you.
Table of Contents
- 1 What is a Credit Card Loan?
- 2 What is a Personal Loan?
- 3 Personal Loan vs. Credit Card on Credit Score
- 4 Credit Card vs Personal Loan Calculator
- 5 Is it better to have a Personal Loan than Credit Card Debt?
What is a Credit Card Loan?
A credit card is a handy and convenient way of a loan that literally lives in your wallet. While your debit card holds the balance of your bank account, a credit card is money offered to you as a loan in your card; there is of course a credit limit too.
Over the course of the month, you may choose to spend that credit limit on your expenses like rent, utilities and even entertainment. When the month ends, or the credit limit ends, you have to pay the principal amount of the credit you used along with the interest rate. A credit card is basically your cycle of debt; you pay one credit so you can get it again for the next month.
If you can’t pay the amount one month, the interest amount is piled up and when it is time to pay, you’re actually under a lot of debt. With credit cards, people often forget to pay the amount, but the interest keeps adding up making it a vicious cycle of debt.
What is a Personal Loan?
A personal loan is a short-term loan granted to people for emergencies as a means of fast cash. This may be borrowed from a bank, credit union or an online lender, and the money is then given to the borrower on an interest rate.
The loan is to be returned in a period that usually ranges from two to seven years, and an interest rate that adds on with the principal amount each month. Most personal loans are unsecured loans, which means they do not require any sort of collateral. And because of this the interest rates are relatively higher because there is a high chance of the borrower defaulting on the loan.
Getting a Personal Loan for Credit Card Debt
A credit card debt can revolve round and round and really pile up when it is time to pay. A credit card debt solely depends on how much you spent in one month, and how you’re going to repay it. The budget can really shake if you had unexpected expenses to take care of: medical emergency, child expense or anything you hadn’t included in your monthly budget. Now that it’s time to pay, you’re in a fix because you don’t have any savings to pay it from.
That is when people take personal loans to pay for their credit card debts. If you have a good credit score, chances are that you’ll get the loan at a competitive rate and you can pay off the credit card debt. It will be unsecured, so the interest rate of paying it may be higher.
Personal Loan vs. Credit Card on Credit Score
For a credit score to increase, a personal loan and credit card both are great for this purpose. Credit scores are basically metrics used to measure a person’s ability to pay back the loan and whether they will default on it or not. A low credit score will make a person a high-risk borrower, meaning that person has a higher chance of defaulting on the loan.
However, paying on a monthly basis will have a credit card affect your credit score more than a personal loan. With a personal loan, the monthly payments are fixed and each month you’re required to pay that specific amount. But with credit cards, the borrower has the option whether to pay the amount in full or depending on their balance. Thus, making that choice each month has a bigger impact on the credit score.
Credit Card vs Personal Loan Calculator
If you’ve had a major debt on your shoulder, there is a chance to overcome it through either a personal loan or a credit loan. But first, it is important to run the numbers and see how much debt you can overcome by means of consolidating it.
There are many online calculators available that help you determine a close estimate of what you should be expecting. It will ask you to insert data about the loan, interest rate, equity etc. and will then help you determine the monthly payment. You can then evaluate whether this payment is affordable against your income each month.
Is it better to have a Personal Loan than Credit Card Debt?
It all comes down to this, whether it is better to have a personal loan than a credit card debt. To evaluate this, let’s compile a list of pros and cons for both options:
Personal Loans Pros:
- Low interest rates
- Great option for consolidating debt if you can get a lower interest rate.
- You can apply for a personal loan online or at a traditional bank or credit union
- Secured or unsecured (may or may not require collateral)
Personal Loans Cons:
- Repayment schedule that must be followed.
- Requires a good credit score- major drawback for high-risk borrowers.
- May or may not qualify based on the credit rating.
Credit Card Pros:
- Credit card applications can be made at any time, then only use it when you need it.
- Credit cards are fairly easy to qualify for if you have average or good credit.
- Online applications are accepted.
- Some transfer credit cards offer 0% interest for anywhere from 12 to 21 months, making it easy to consolidate debt.
Credit Card Cons:
- Interest rates pile up very quickly.
- Some credit cards charge annual fees, over-the-limit fees, and late fees.
- You will need good credit to qualify for a low rate of interest.
- While you can pay for many services with a credit card, if you need cash, you may owe a cash advance fee or convenience check fee, and interest may start accruing immediately.
The conclusion to this list is that according to every person, the situation may differ, thus their needs may too. If a person is well qualified for a personal loan, it is better than having a credit card accumulate interest over time. Moreover, a personal loan can be asked from a close friend or family member who may trust you enough to pay for your emergency and you would pay them back over time.
This option saves you from hidden bank charges and the pressure of interest rate accumulating over time if the payment is late. However, loans from personal contacts should NOT be taken for granted and must be paid when the time comes.