Guide to Credit Cards and Loans

Credit cards and personal loans are both popular and convenient tools for borrowing money. Both have their own pros and cons. At times, it is critical to fully comprehend the benefits and downsides of each type. But doing so can help you save a lot on interest charges and prevent debt from accumulating.

We will cover the details of each in-depth, but there is a rule of thumb for both the tools.

Credit Cards: Credit cards are perfect for a short-term loan that you can pay off within a year. You can also pay off your debt within the 30-day grace period to avoid any interest costs.

Personal Loans:  Personal loans are for those who need larger loans for expenses like buying a house or car or investing in a business. A personal loan comes with extra time to repay in smaller monthly payments. This makes paying off loans easy as the payments are easy to predict. However, there is a significant interest cost with some of the loans. If you take several years to repay the loan, you end up paying a lot in interest.

Now, it is time to dig deeper into credit cards and loans. Let us understand the two first and then compare them.

Personal Loans

Personal loans are a one-time unsecured lump sum that you get in a large amount. Lenders often grant the loans directly into your bank account. Then, you can do use the money to buy or invest. Some lending companies like American Express can send the money to your credit card to help you consolidate debt in one place. Before you take a personal loan, here are some important terminologies you must familiarize yourself with.

 Lump-sum loan:  Lump-sum loan is another term for personal loans. The fact that you receive the entire amount of loan at once is why we call personal loans lump-sum loans. You cannot borrow more money after you get a lump-sum loan.  Some lines of credit do allow additional borrowing but have certain eligibility criteria that you must fulfill.

A major benefit of a personal loan is that you get a large amount of money at once.  Another benefit is that you cannot overspend when you get a lump-sum loan.

Monthly payments:  The amount of money you give each month to repay your loan is the monthly payment. It is normally fixed. A certain portion of each payment is your interest cost. The rest of the amount goes to pay your loan.

Repayment term:  Personal loans normally last for three to five years. But institutions do offer long and short-term options as per your requirements.  The longer the repayment term, the smaller monthly payments you have to make.

If you do not have a steady income or you have just started your career, a longer repayment term might work for you. However, low payments aren’t usually the ideal option. Low payments mean stretching out your repayment term. This results in higher interest costs and so raises the price of whatever you have borrowed the loan for. When buying a loan, it is very important to consider both the short term and long term benefits. This will help you decide how much of a monthly payment to set.

Personal Loan Lenders

There are several options for you to get your personal loan from. Experts recommend that you get a quote from at least three lenders. Here are the different types of lenders you can find.

 Banks

Banks are a traditional source for personal loans. Banks evaluate your credit score and monthly income to determine if you are eligible to receive a loan or not.

Credit unions

Banks and credit unions both have similar working operations and laws. Credit unions usually offer better customer service and low-interest rate and fees. However, banks are more convenient in terms of location, technology, mobile access, and rewards.

Online lenders

 One of the greatest benefits of online lenders is that you get a loan from the comfort of your home. You just need to apply from your computer or mobile to receive a loan from an online lender. Online lenders are known for offering low cost and softer eligibility criteria.

If you have a low income and a long history of borrowing, online lenders could be the best option for you. Even borrowers with good credit history can find better deals online.

Specialized lenders

This type of lender provides loans for specific purposes. Specialized lenders are non-bank lenders who target commercial and consumer borrowers. Taking a loan from a specialized lender can be a better alternative to those who want to take a long-term credit card debt. For instance, some specialized lender focuses on mortgage and home buying, while others provide loan solely for medical treatments.

Credit Cards

Like personal loans, credit cards also provide unsecured loans. This means they don’t require any collateral. With a credit card, you have a line of credit or a certain amount of money to spend form. You borrow from the credit card when you make any purchase. Then, you repay and repeatedly borrow as long as you stay within your credit limit.

Charges and Fees

You have to be watchful of how you use your credit cards. There are several ways you can incur charges from your credit charges.

 Watch out the interest rate

 If you don’t pay off your credit card bill at the end of the month, you end up not being in the 0% introductory period.  You have to then pay the interest on the whole credit card statement instead of the part you didn’t pay for.

If you are a new customer, you should check the interest rate. See whether the interest covers purchases, transfers, or both. Remember, that the interest will not cover any cash withdrawals.

When your introductory period is over, do check what the interest rate is. Make sure you repay in full once the introductory period is over.

When you transfer balance from another card, you will be a charged with a fee.

Don’t let late payments damage your credit rating

In case you make a payment after the deadline of your statement, you will pay late fees. Paying your credit card bills late negatively impacts your future credit score. A bad credit score is unfavorable for when you require another loan or a mortgage in future.

Pay maximum credit card bills

When you get your statement, don’t aim to pay off a minimum amount. Always try to pay as much as you can. Making minimum payments will make your loan longer to pay off. You will also end up paying more than what you borrowed.

Charges of cash withdrawal

There are charges you have to pay whenever you withdraw cash from your credit card. The fees can be as much as $5 per withdrawal. You also incur charges for other transactions like purchasing gift cards or foreign currency.

Credit card cheque

Credit card cheque is like a normal cheque. However, with a credit card cheque, the money goes to your credit card bill instead of your bank account statement. There are certain conditions where you may need credit card cheque. But it is better to avoid it as it is expensive and has less protection. There is a higher interest rate and additional fees on credit card cheques.

Credit Card vs. Personal Loans

Building credit

Both credit card and personal loana can help you build credit. Your credit card is a revolving debt. A personal loan, on the other hand, is an installment debt. Paying both your credit card bills and repayment of personal loans builds your credit history. When you have a good credit history, it builds your credit score.

Repayment time

When considering the repayment time, personal loans have an upper hand on credit card. When you receive a personal loan, there is a fixed repayment time. As long as you make the required payment, you pay off the loan at the end of term. This way, you know when you will be debt-free.

For credit cards, you don’t have a specific time for repayment. Instead, you have a credit limit your spending shouldn’t exceed. Although maintaining a credit score enforces paying bills on time, those who tend to overspend can get careless with a credit card.

You have to be your own guard as to when you should pay your credit card loans and avoid overspending. If you are not careful with repaying your credit card bills, your loan can stick around for a long time.

Which is best?

There is no perfect answer to which one is the best option. It is crucial that you use your debt wisely. To choose the best option for yourself, you must dig into the details of each loan available to you. Compare the interest rate, annual fees of credit and origination fees of personal loan.

Determine which option is better for your income and how you would pay off the loan. With all this estimation, you can calculate the total cost of borrowing.