When a person needs a little extra money, credit cards and personal loans are two of the most common options available. While a personal loan and a credit card both can be used to help a person to finance a purchase or expense that they cannot cover in cash, there are some important differences between the two. By understanding the differences between credit cards and personal loans, a person can consider his or her personal situation and decide which is the best to use in a particular situation.
For a sudden expense, credit cards are usually a better choice than a personal loan as they can be used quickly. For a personal loan, a person must apply for the loan with a bank or other financial institution. The bank will then consider the credit worthiness of the borrower, the amount needed and other factors before reaching a decision. In most cases, a person needing a loan should expect to wait at least a few days to get approved for a personal loan. With a credit card, a person can make a purchase with the card whenever it is needed, as long as it does not exceed the balance of the card.
In almost all cases, a personal loan will have a lower rate of interest than a credit card. For those who will carry a balance for any length of time, it will cost less to borrow the money on a personal loan than on a credit card. In fact, it can be a wise financial move to take out a personal loan at a low interest rate to pay off a credit card balance with a high interest rate. However, there is one exception that will make the credit card a better deal. If a person can pay off the credit card balance in one month, no interest will accrue on the credit card.
Personal loans come with fixed payments, but a credit card’s payment will be determined by the balance on the card. In most cases, the credit card payment will be lower than the payment on the personal loan. The smaller payment may be convenient, but it will take longer to pay off the debt when making small payments. In addition, making smaller payments will result in paying more interest on the loan over time. No matter whether a person makes the purchase with a credit card or a personal loan, it is important to make the payments on time and in full to avoid damaging his or her credit score.