Most people don’t think twice when whipping out their credit card to pay for something. What most don’t realize is that there are certain instances when taking out a personal loan is actually a more cost-effective way of paying for something, especially larger purchases.
Here are three of the main ways a personal loan trumps a credit card.
The main reason a personal loan beats a credit card are the interest rates. Credit cards are notorious for their sky-high interest rates. The current national average APR (annual percentage rate) sits at 15 percent. Unsecured personal loans range between 6 and 35 percent. Bear in mind that unsecured loans are easier to get because they do not need collateral, and therefore, put the lender at greater risk, so rates can sometimes be high. Secured loans which ask for some form of collateral, such as a car or house, generally have lower rates. The rate you will qualify for, whether a secured or unsecured loan, depends on your credit score, income, and overall debt usage. If you have a clean credit record, you could enjoy interest rates of as little as 6 percent, lower than most credit cards.
In the world of credit, there are different types of credit. Credit cards are revolving credit. This means it is always available and how much is available depends on how much you have paid and what the balance is. Personal loans are types of installment credit. This means the loan has a fixed term, and you pay monthly installments until the debt ends and the account closes. And that’s it — no more debt and no temptation to continually run up more debt like we often do with a credit card. Additionally, it might be a good idea to use a personal loan to combine all your credit card debt. You’ll pay one monthly payment and at a lower interest rate.
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Credit card payments fluctuate from month to month depending on how much you have paid and whether you have made any purchases in that month. For the undisciplined among us who can’t resist swiping that card, you could face an ugly surprise on your bill at the end of the month. The fixed monthly installment of a personal loan is good for budgeting purposes. You know exactly how much your loan repayment is every month. No ugly surprises putting a dent in your budget.
Choose your lender wisely. In some cases, once you consider all the fees and rates, a loan may actually end up costing more than the credit card. Shop around. Some lenders like Lightstream, Peerform and Avant do not charge an origination fee, making a personal loan a more attractive and cheaper option than the high interest-bearing credit cards. So before making your decision, do the math and factor in the origination fee, APR, and term of the loan to see if it is worth it to swap the credit card for a personal loan.
Before making your decision, do the math and factor in the origination fee, APR, and term of the loan to see if it is worth it to swap the credit card for a personal loan