It’s always a good time to assess your financial state. In this case, we’ll tackle more than your spending habits and redirect the conversation towards knowing the difference between taking out a personal loan or applying for a credit card and the advantages and drawbacks of both.
Continue reading to discover and learn about their interest rates, monthly payments, and how to compare personal loans and credit cards from one another.
In a Nutshell: Credit Card vs. Personal Loan
To begin, we want to acknowledge that credit cards are great for lifestyle purchases such as gasoline and groceries, as well as emergency cases. They simply give you financial flexibility that a weekly budget cannot. However, credit cards can be challenging to handle if you cannot control your spending or are not mindful of your expenses.
On the other hand, personal loans are ideal for consolidating credit card debt while minimizing total interest paid. Personal loans can be utilized for a variety of purposes, including home upgrades and significant purchases. Although, receiving a lump-sum amount of a personal loan also requires the strict payment of monthly dues.
The Interest Rates
If we’re talking about interest, it is less expensive to obtain a personal loan than to use a credit card. Credit card interest rates range from 15% to 20%, depending on your credit score. A personal loan usually has an interest rate of roughly 10%. Although the 5% difference may not appear to be much, it could quickly add up in the long run.
Here’s a clearer picture: A $15,000 personal loan at 12.5% (15.742% annual percentage rate) would take 36 months to repay and cost roughly $3,064.96 in interest. With a 17.99% credit card interest rate, the same $15,000 would take 253 months to pay down, costing nearly $14,000 in interest!
Certain credit cards offer 0% APR on debt transfers for the first 30 days. Obtaining such a bargain leads to substantial interest savings. However, there are downsides, as with anything.
To take advantage of the low-interest rate, credit card firms often charge up to 2% on balance transfers. Interest rates soar after the initial 30-day period of zero interest. As a result, before agreeing to a balance transfer, read the fine print.
The Charges Per Month
Because personal loans are for a set period, the minimum monthly payments are higher in cost than those for credit cards. Because the balance is paid off sooner, you pay less unnecessary interest. The financial predictability of a fixed-term loan allows you to budget for your monthly expenses, knowing exactly how much will go toward your debt.
Meanwhile, monthly credit card payments range between 1% and 2% of total debt. While this reduces your monthly payment, you will wind up spending much more in interest throughout the credit card life.
Additionally, your monthly dues may fluctuate because credit card balances are never fixed. The shifting minimum payments may make it challenging to stick to your budget or keep track of your expenses.
Again, reassessing your financial situation is merely the responsible thing to do. In knowing the difference between a personal loan and a credit card, you’re able to consider your lifestyle and your expenses for future purposes. This way, you also become knowledgeable about handling money in a practical way.
Are you looking into applying for a personal loan in Atlanta? Central Loan & Finance has been serving Atlanta since 1967. We respect strong relationships, so when it comes to credit, we believe judging a book by its cover isn't always accurate—we'll never reject somebody down. To learn more about our financing alternatives, contact us today!