There are several options available to you when you’re looking to borrow money, and depending on your situation, you could think about getting a personal loan or using a credit card. Money problems affect everyone, and you never know when you may fall on hard times and require additional funds in your life. No one likes borrowing money but sometimes in life, you have no other option but to apply for loans to deal with financial difficulties. You can borrow money with credit cards or through loans, but you should know that both options have different requirements and purposes.
To give you a better idea, Bonsai Finance is going to provide you with an overview of the key differences between credit cards and personal loans.
Long-Term or Short-Term Debt?
When it comes to credit cards and personal loans there are some key factors that you must consider, essentially whether you’re comfortable with short-term or long-term debt. If you’re thinking in terms of short-term debt, credit cards are your best option, since they allow you to pay off the debt on your terms, and you can easily manage that within a few months.
Personal loans, on the other hand, are better when you’re dealing with long-term expenditure; they should be considered for expenses that will take a long time to be paid off. For instance, if you’re dealing with numerous large debts, you should think about getting a personal loan, since it is a better choice than trying to pay off your debts with your credit card. This is because the interest rates on your credit card are going to be higher than your personal loan.
Credit Cards are More Expensive
If you’ve got large expenses for the long-term on your credit card you could be in serious trouble. Credit cards have gotten a lot of people into financial trouble, due to the high interest rates that are attached to them. They are also billed monthly and will compound interest until you pay off the debt. You could even be faced with an interest rate that goes into double digits, which is one of the main reasons why making a large purchase with a credit card is going to place an unnecessary burden on your financial health.
However, credit cards can make sense if you’ve got a good credit score that allows you to qualify for the 0% APR introductory offer, and you are able to pay off your debt before the expiry of the offer. It will just be like borrowing money with no strings attached. You should never use your credit card for large purchases unless you’re dealing with an emergency since you’ll end up with a never-ending debt that will keep on growing with the high interest rate.
Personal Loans Have Different Forms
The great thing about personal loans is that they come in different forms. For instance, when you’re consolidating debt, it will be known as a debt consolidation loan. It is a personal loan, but the lender or the bank makes a single loan for you to pay off all the debts and will then charge a monthly payment from you. It’s a good idea to use a personal loan when you’re making large purchases, or if you’re paying a substantial amount of debt. However, you should only use this option if the interest rate is in your favor, and you must calculate this before you choose to apply for the personal loan.
There is one key difference that separates personal loans, and that is where they are secured or not. Securitization is about putting up some collateral to ensure that that the lender can pay off the debt. Mostly collateral is going to be something like land, real estate, or even a car that is paid off. If you don’t manage to pay off the personal loan, the lender can then take possession of the collateral as compensation for any losses they suffered.
Whether the loan needs to be secured with collateral or not is decided by your credit history and the amount of money you’re borrowing.
The Key Differences Between Them
There’s nothing wrong with using credit cards, as they only add convenience into your life but you should use them in moderation since paying off your credit card debts can be difficult if you rack up large numbers. You should use them as short-term solutions and don’t use them for long-term purchases since that can backfire on you easily.
When it comes to personal loans, you shouldn’t use them for short-term solutions. It doesn’t make any sense to apply with your local lender and going through the extensive process to borrow money that you’ll be paying back in a matter of weeks.
To ensure that you make the right decision, you must understand that even though both financial products are beneficial in the short-term. If you’re thinking about the long-term, it’s best if you save money for those expenses. That is easier said than done because life is difficult and can throw up surprises when you least expect them. However, understanding the role that both these financial tools can play in your life will help save you from a lot of problems in the future.
It’s important that you understand all the costs that are involved and consider that any personal loan you apply for will have origination fees, along with other fees that you must pay as well. Therefore, you should always shop around and look through all your options to ensure that you find the best possible personal loan for yourself.
If you plan on using your credit card to pay for something, you must ensure that you can pay off the debt quickly so that you don’t suffer from the interest rates. The longer you can’t pay the bill of your credit card the more difficult and expensive it will get to pay them off. This is the reason why it’s important to learn the key differences between credit cards and personal loans, as it allows you to make financial decisions in your best interests without being overburdened with debt.