Sometimes you need a little extra cash, but which road do you down? A Personal Loan option or a Credit Card? Both have good and bad points. It depends on what you want the funds for and how long before you want to pay it off. Choosing the right option and one that suits your financial situation will help you in the future.
The main difference between the two is that credit cards are an ongoing form of credit whereas, personal loans have regular repayments until they are paid off within a certain amount of time. Personal Loans are generally between 1-7 years and you receive a lump sum into your account when you take out the loan. Credit cards are similar in a way that you have a sum of money to use at the start in the form of a credit limit. You are required to make a minimum payment each month depending on how much you have owing, however, it is not as structured as a personal loan. With credit cards, you can redraw on those funds which differentiates it from a personal loan as once you have made a payment you cannot take that money back out again.
Fees and ongoing costs:
Some of the options that credit cards have are interest-free periods on some credit providers, rewards and balance transfers. Credit cards can have annual fees and the interest rate can vary depending on the use of the card. If you do not end up paying your card off within the billing period you will have to pay the interest on the amount you have spent. Therefore, you are constantly paying interest on your credit card. A fixed rate personal loan stays the same and is included in the repayment amount so there are no surprises. Personal loans can work out cheaper in the long run as opposed to a credit card. Some lenders can have monthly fees and there is usually an application fee involved.
Time frames for personal loans and credit cards:
Personal loans can sometimes take longer to process and to receive the funds within your account. You will also have the debt for a longer period of time. Whereas, credit cards can be quicker to process and you can start spending sooner. This can bring about a higher temptation to overspend. Personal loans are better suited for larger one-off purchases like a holiday, a car or to consolidate your current debts. Credit cards are better suited for smaller purchases and everyday spending.
Decide how you want to make your repayments:
With personal loans, the repayment amount is the same and usually falls on the same date each month, so you can prepare for the deduction from your bank account. With this information, you will be able to figure out if that repayment amount fits into your budget and whether you can afford it. With credit cards, you have the flexibility in when you make the payments and how much you pay (as long as it is at least the minimum amount required). You can get caught out paying more than you budgeted for.
Personal loans and credit cards are both forms of finance and both have their benefits and downsides. Be sure to work out your budget and research all options available before making a decision on which one to choose.