Personal Loans vs. Credit Cards

When you need to borrow money, you will likely have several different options to choose from. You could consider using a credit card, or perhaps getting a personal loan, depending on the situation. In general, both will allow you to borrow money, but at the end of the day, they have different purposes and requirements that you should be aware of.

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Short or Long-term Debt?

The first thing you should think of is how long you wish to finance the purchase or expense that you are taking on. As a general rule, credit cards are better for short-term debt as you can pay off on your own terms, and hopefully, you will be paying it off within a few months. Personal loans are typically better for longer-term expenses, ones that you know you won’t be able to pay off very quickly. For example, if you are consolidating several large debts, then a personal loan makes more sense than consolidating it all on a credit card as the interest rate will be much higher, under typical circumstances.

Credit Cards Can Be Expensive

A longer-term and larger expense can be a serious problem on credit cards. Far too many people find themselves in financial trouble due to credit cards, and this is because of the high interest rates that are typically attached to them.

They bill monthly and continue to compound interest along the way. It’s not rare to have an interest rate that is well into the double digits, and therefore a credit card can make a large purchase seem like a weight around the neck of your financial health.

That being said, if you have good enough credit to qualify for a 0% APR introductory offer, and you know that you can pay off the debt before the offer expires, then the credit card could make sense. After all, it’s essentially borrowing money “for free.”

Unless it’s an absolute emergency, larger purchases should almost never be put on a credit card unless you fall into this category.

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Personal Loans Take on Various Forms

Personal loans can take on various forms. For example, you could be consolidating debt, and this falls into a subgroup known as a debt consolidation loan. It’s essentially a personal loan, but the bank or lender makes one loan in order to pay for all of your debts, and then charges you a monthly payment.

On the other hand, you could be taking out a personal loan, and simply borrowing money to use as you wish. As a general rule, you should be using a personal loan for a larger purchase or to pay off large amounts of debt, but only if the interest rate makes sense. This is something that you must sit down and calculate ahead of time.

One major difference between many personal loans is whether or not they are secured. Securitization is simply the process of putting up collateral to make sure that the lender can be made whole on the debt. Typical collateral will be something along the lines of a paid off car, perhaps real estate, or even land.

If you default on the personal loan, this gives the lender the right to take possession of the collateral to recuperate any losses that they incur. Whether or not you need to secure the loan with some type of collateral will more often than not be determined by the amount of money borrowed, and most importantly, your credit history, which will greatly influence if you are approved for a personal loan or not.

Understand the Differences Between These Two Financial Tools

Credit cards can be a good thing, but they need to be used in moderation. They should be thought of as a short-term solution, not the long-term solution that so many people have been using them for.

On the other hand, a personal loan isn’t necessarily a short-term solution, because it makes no sense to go through the application process at your local lender to then simply borrow money that you will be using and paying back within a few short weeks.

Because of this, you should understand that while both of these financial products can help you in the short term, over the longer-term it’s always going to be preferable to save money for expenses. Obviously, life gets in the way and it’s difficult to do so quite often but understanding the role that each one of these tools can have in your financial life will save you a lot of trouble down the road.

Be aware of all the costs involved, and keep in mind that the personal loan may have origination fees, and other fees attached to it. Make sure you shop around to find the best personal loan, if this is the route that you are going.

If you are using some type o credit card to pay for something, make sure you pay it off as quickly as possible. The longer you wait to pay off these credit cards, the more expensive they get.