When you’re in need of borrowing money, you may be contemplating between a personal loan and a credit card. There are significant differences between the two, and it’s important to know the difference. Credit cards are good for short-term purchases that you can pay off quickly. Personal loans work better for bigger purchases, and for consolidating debt. To really understand this, you have to fully understand the difference between the two.
What’s A Credit Card?
In terms of financing, credit cards are one of the most expensive forms. Unless you have stellar credit, you can expect exorbitant interest rates.
Every month, you must make a payment on your credit card. You’ll have to make at least the minimum payment – about 2% of the balance – but paying off your card in full is the only way to avoid interest. Interest is based on the daily average balance, not the balance at the end of the month.
Credit card debt is a different kind of debt. You can only borrow so much, and the amount of debt you have depends on how much is on your card.
Since they’re so expensive, credit cards should only be used for short-term financing. Many only use their credit card for things like groceries and bills, so the card is paid off in full each month. Whenever possible, you should use your card for purchases you could also pay for in cash. Using a credit card like this is beneficial for your credit, plus many credit card companies offer cash-back rewards.
What’s A Personal Loan?
Personal loans often have lower interest rates than credit cards, especially for those with good credit. When you get a personal loan, you receive the money in one large sum and pay it back over time. Usually, you’re paying back a personal loan for 2-5 years. Each payment includes both interest and principal.
It is a good idea to use a personal loan for long-term financing. They are also a smart way to consolidate debt. The lower interest rates make it ideal for anyone struggling to make their credit card’s minimum payment.
Don’t struggle with your finances any longer. For financing questions and advice, contact us today.