Although it is sometimes convenient to simply grab a credit card, charge those expenses, and forget about them until it’s time to make a payment, credit cards aren’t always the best answer. In some cases, a personal loan may be a more sensible and affordable way to pay for a large purchase over time.
HOW DO PERSONAL LOANS WORK
Personal loans are unsecured fixed-term loans that you can use for just about any purpose – paying for your wedding, remodeling your home or taking a trip. Depending on your credit score, a personal loan may or may not have a lower interest rate than a credit card, but they can still be a safer financial tool because you’re paying off your debt in equal installments each month.
HOW IT’S DIFFERENT THAN CREDIT CARDS
A credit card has a credit limit that you can use as often as you like and it’s up to you to pay the entire balance off at the end of the month. If you don’t, you begin to “carry a balance”—you’re paying interest on a debt but you still have the ability to make new purchases. A personal loan, on the other hand, is a fixed debt. You receive a fixed amount of money and repay it in equal installments over a fixed number of months.
WHY IT MAY BE BETTER THAN A CREDIT CARD
Personal loans are best for larger purchases that will take you more than a year to repay or when you don’t want to be tempted to overspend with a credit card’s open credit limit. Also, personal loans tend to offer lower interest rates than credit cards, this is especially true if you have good or excellent credit.
The big difference with a personal loan is that you’re given a lump sum upfront instead of a credit card to use for purchases. Personal loans can be unsecured or secured. With an unsecured loan, you aren’t required to put down collateral, while a secured personal loan requires collateral of some type.