Person Loans vs. Credit Cards | BCCU

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Personal Loan vs. Credit Card—The Pros and Cons.

Authored By: BCCU on 10/10/2017
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What fits your needs—a personal loan or a credit card? Get started by trying our calculator.

Sometimes savings just aren’t enough and your dreams are bigger than your bank account. Other times you may be experiencing a financial emergency and be in need of funds to solve an immediate problem. Today’s world has many solutions and the first ones that may come to mind are loans and credit cards. But which route is best for your situation? We’ll look over the good and the bad of both to help narrow it down.

Personal Loans

Personal loans are great for large purchases that may require a sum of money up front that borrowers can pay back over a longer period of time. The lender will provide the sum of money granted to the borrower, who will then have a certain amount of time to repay the loan. Each payment, usually paid monthly, includes interest that can fluctuate depending on interest rates and the type of loan. Personal loans are easy to budget for, especially at a fixed-rate where the interest doesn’t change, and are usually for larger sums of money paid back over several years, rather than several months.

Try our personal loan calculator here.

Loans can be risky as well, with some requiring collateral in case of non-payment. Since most loans are for larger sums of money, collateral could include cars or property owned by the borrower. Fall too far behind on your payments and the lender can seize your collateral as a form of repayment. Without a secured loan, interest rates can be higher and could cost you more each month.

Credit Cards

For things that don’t require a lump sum upfront, opening a line of credit like a credit card may be a better option. In this case, you pay back money from your credit card as you use it, or within 30 days of your purchase to avoid interest charges. You can use credit cards funds at any time until you’ve hit your credit limit. As well, credit card limits are usually much smaller than the amount you would generally get from a personal loan, which may make it easier to pay back, and can include rewards programs for travel points or a percentage of cash back with frequent use.

However, credit cards give you less time to pay back your debt and can accumulate fees and high interest upon failure to pay. If a borrower were to spend more on their credit card than they can afford in a monthly payment, it’s possible they will be catching up on payments for longer than expected. Coupled with sometimes high interest rates, this can lead to unmanageable debt, and can make credit cards a less consistent way to borrow money.

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Download our Loan Basics handout here—just right-click the image to save it.






Payday Loans

Although a quick and easy way of getting a loan without a credit check, payday loans are not usually your friend. These loans are usually for smaller amounts of money, anywhere between a couple of hundred to a couple of thousand dollars depending on the laws in your state. You may think you’ll be able to pay it off rather quickly, however these types of loans usually have outrageous interest rates, as well as an initial fee to receive the loan. For most payday loans, the average annual percentage rate (ARP) is about 400%, but in some cases can be as high as 5000%. Compared to most credit cards that sit at around 9-30%, that’s a lot of extra money, so always be very cautious when considering a payday loan.

Which option fits your needs?

If you’re looking to fund a large financial endeavor, require a longer period of time to repay debt, or prefer a more consistent and manageable payment schedule, a personal loan may work best for you. However, if you’re looking to make smaller purchases over time and use a line of credit that is continuously available to you below your limit, the best option may be a credit card. Call us at 603-645-8181 for rates and options on personal loans or credit cards.


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