If you’re about to make a big purchase or consolidate debt, you have a number of financing options to chose from. The big two are a credit card and a personal loan.
Which one is right for you? There are pros and cons to each, and it will depend on a number of factors. We’ll walk you the options and evaluate a personal loan versus credit card.
Many personal loans are unsecured. That means a lender will not require any collateral, like the title to your car, as a condition for lending you money.
You can apply for the loan with your financial institution or look online for a lender. The average interest rate on personal loans for people with fair to good credit is between 6 and 36 percent.
Personal loans are a good option if you want to consolidate high-interest rate credit cards, or you’re about to make a very large purchase. What do we mean by large purchase? This would be something you won’t be able to pay back in a short amount of time.
For example, a personal loan might be right for you if you’re planning to renovate your kitchen. Or, you might take out a personal loan to cover the cost of moving cross-country and into a new apartment.
A personal loan is considered an installment loan. You borrow a fixed amount of money and pay it back in equal installments over a specific period of time.
We all know what these are. Credit cards have a limit, and you can purchase goods and services up to the amount of your limit.
The average interest rate for credit cards in 2019 is between 17 and 24 percent. Remember, that’s the average. Some cards have a much higher interest rate. Discover the best credit cards for your needs.
Credit cards are helpful for smaller purchases that you can easily pay back in a short amount of time. A lot of people prefer to use a credit card for household expenses, rather than cash or a debit card. If you pay it off every month, you won’t pay any interest.
Personal Loan versus Credit Card
So now the big question is, which one is right for your needs today? You should ask yourself a few questions before you decide.
What are you going to use the money for?
If you already have a lot of high-interest credit card debt, a personal loan might be right. You can consolidate your payments into one loan with one monthly payment. Just make sure the interest rate is lower than what you have now.
How’s your credit score?
This will be the deciding factor for a lot of people. If your score is below 600, you probably won’t be approved for a personal loan. If you get one, the interest rate could be as high as 35 or 40 percent.
Will you overspend?
If that plastic card in your wallet is too big a temptation, a personal loan might be a better option. It will give you a fixed amount of money for a specific purpose.
If you’re trying to consolidate credit card debt and get out from under the high-interest rates, you might consider a new credit card.
If you can qualify for a 0 percent introductory offer, you can transfer the balance of your high-interest cards to the new one. Just make sure you pay it off before that introductory rate expires.
As you consider a personal loan versus credit card, it’s important to remember that they’re both forms of debt. You will have to pay the money back at some point.