Editor's choice: LendingClub personal loans
- Coapplicants welcome
- Check your rate without affecting your credit
- May qualify with a credit score of 640
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When you’re in the market to make a major purchase but don’t have all the cash on hand, borrowing funds can be a viable route. It usually comes down to two options: credit cards and personal loans. Both have pros and cons, but choosing the one that best suits your financial situation could save you money in the long run.
Personal loans and credit cards are both types of credit that you have to repay with interest. However, there are some differences between the two.
|Personal loan||Credit card|
|Interest rate||Generally 2.99%-36.00%||Generally 13.99% to 22.99%|
|Borrowing limit||Can be up to $100,000||Can be as high as $50,000|
|Funds disbursement||One lump sum upon approval||Revolving credit on card|
(cash advances available as well)
There is no single answer to this question. While a credit card might be the right choice in one situation, a personal loan might be more suitable in another. And in a third situation, neither might be appropriate.
Here are some questions to ask to help decide which credit product might best meet your needs:
Imagine this scenario: Ashley recently bought a home and is looking to fund some renovations. Since she has no equity, she narrows her options down to a credit card and a personal loan. The personal loan has a term of four years, and Ashley decides she’ll calculate the credit card’s monthly payments based off the same term.
|Credit card||Personal loan|
|Credit limit or loan amount||$7,500||$15,000|
|Total interest paid||$3,264.04||$2,074.77|
Because Ashley has carefully budgeted for the home renovations, she knows she can afford the higher payments the personal loan requires. And since she can borrow more — while paying less in interest — Ashley decides to go through with the personal loan rather than the credit card.
Credit cards and personal loans might both come with APRs. But it doesn’t quite work the same way. With a personal loan, you’ll typically pay a percentage of your loan principal in interest each month — this amount can vary, especially if your loan is amortized.
With a credit card, you can effectively avoid paying interest if you’re able to pay off your balance each month. You’ll only pay interest when you have a balance that takes more than a month to pay off — which can take less time than a personal loan. So while credit card rates might be higher, they also come with the option of completely avoiding interest payments.
Debt consolidation involves merging multiple debts into one loan or credit card. It simplifies your monthly payments and could save you money if you find a lower interest rate. There are two main ways to do this: With a debt consolidation loan or a balance transfer credit card.
Personal loans and credit cards are two forms of borrowing that both offer attractive benefits and some notable drawbacks. Which you choose is ultimately up to you, and many people have used both at different points for different purposes. Be sure to compare your options to make an informed decision.
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