When to use a personal loan rather than a credit card
When to use a personal loan rather than a credit card

Make sure you know when a personal loan will offer better solutions to your financial needs than a credit card. (iStock)

Sometimes it’s hard to know if a credit card or personal loan is the right choice for your current situation. Although both options have their own advantages and disadvantages, a personal loan is generally a better solution.

Credit cards offer a revolving line of credit, which means you can access funds whenever you have credit available. Yet they often come with higher interest rates and monthly payments vary.

Personal loans offer a single lump sum cash payment. Personal loans often offer lower interest rates and most lenders offer fixed monthly payments. Some lenders will allow you to take out more than one personal loan at a time, but it depends on the lender’s rules and your credit history. Those with bad credit may have more restrictions or not get the lowest rates.

When looking for financing, be sure to explore your personal loan options. To visit Credible to compare rates from multiple lenders and start the application process.

If you can’t decide which option is best for you, here are some situations where a personal loan is probably a better option than a credit card:

WHAT TO DO BEFORE APPLYING FOR A PERSONAL LOAN

Make an expensive purchase (like a car)

Unless you have a high credit limit with a very low interest rate, a personal loan is likely to offer better terms and more competitive rates. Personal loan amounts vary widely. You can use a loan to cover many expenses, including buying a car, medical bills, home repairs, or travel.

Expensive purchases can cost several thousand dollars. The loan rate could add hundreds more to your overall purchase cost, and your payment could change from month to month.

For example, suppose you make a purchase of $5,000. Your credit card interest rate is 16% (slightly below average). If you do a monthly payment $150 a month, it will take you about four years to pay off and you’ll pay an additional $1,657 in interest.

Now, let’s say you took out a $5,000 personal loan at a 9% personal loan rate with a four-year repayment plan. It would take you another four years to pay off the debt, but your loan repayment would be $124 and you would pay $972 in interest. The personal loan could save you $685 in interest.

Those with excellent credit or a better credit history will get the lowest rates. You can use a personal loan calculator to compare rates and find the best terms.

Debt Consolidation

Personal loans are a great option when you need to consolidate several high-interest debts into one payment. In addition to saving money on higher credit card rates, streamlining your monthly payments makes budgeting a whole lot easier.

Using a personal loan to consolidate your debt can help improve your credit score by lowering your debt-to-income ratio. Plus, on-time payments will also help boost your credit score. An added benefit of consolidating debt with a personal loan is that you extend your loan repayment period. If you’re having trouble repaying your loan, consolidating your debt can help reduce your repayments and extend the time you have to pay off what you owe.

Remember, if you’re using a personal loan to consolidate your debt, don’t go back to spending on your credit cards. You could find yourself in a much worse financial situation without responsible spending.

Using a debt consolidation loan is an easy way to free up some extra cash. Visit an online marketplace like Credible to access your personal loan rates.

5 SMART WAYS TO CONSOLIDATE CREDIT CARD DEBT – AND 5 YOU SHOULD NEVER DO

When you need fixed payments that fit your budget

Credit cards are convenient, but the monthly payment changes depending on how much you owe and whether or not your interest rate increases. If living on a budget is important to you and knowing exactly how much you’re going to pay each month is important to you, opting for a personal loan is your best bet.

When you take out a personal loan, your lender will likely offer you a fixed repayment term (usually one to five years). Your total loan, plus interest, is spread over the total payments. This allows the lender to offer you a fixed payment each month.

HOW MUCH WILL YOU PAY FOR A $40,000 PERSONAL LOAN?

The bottom line

Personal loans are a great option if you want to make a large one-time purchase, consolidate debt, and have fixed monthly payments. Before applying for a personal loan, be sure to visit Credible to connect with experienced loan officers and get your personal loan questions answered.

You have a financial question, but you don’t know who to contact? Email the Credible Money Expert at moneyexpert@credible.com and your question might be answered by Credible in our Money Expert column.

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