Is It Better To Get A Credit Card Or A Personal Loan
If you need to borrow money, you may be considering applying for a credit card or personal loan. Both can help you to fund purchases such as a new car or home improvements, or they can help you to consolidate existing debts. However, it is important to understand the differences between them and choose the option that is best for you.
How Do Personal Loans Work
A personal loan is an unsecured loan that you can use for just about any purpose: Debt consolidation, a vacation, a vehicle purchase, or a home improvement project.
A personal loan works more like an auto loan than a credit card.
- When you take out the loan you receive the loan amount in a lump sum.
- You make fixed monthly payments for the agreed-upon term .
- Personal loans usually have terms between two and five years.
- Personal loans usually have a fixed interest rate.
- There is no penalty for paying off the loan early.
Typically, you can apply for a personal loan entirely online. To apply, youll need to provide your personal and employment information on an online credit application. The bank may ask to see proof of your income, such as a pay stub or W-2 form. Generally, the bank will let you know if youre approved within one or two business days.
At this point, youre under no obligation to take the loan you usually have a week or so to decide. You can review the interest rate and terms of the loan and decide whether it fits your needs. If you accept the loan, youll sign a promissory note and the money will be transferred into your checking account. Youll then receive billing statements and must make equal payments each month on the due date.
How Do I Get A Balance Transfer Credit Card
Before applying for a balance transfer credit card, check your credit reports and and gather the personal information youll need to provide, including your income and Social Security number. Next, compare the fees, APRs, perks and credit requirements of different balance transfer credit cards. Our list of the best balance transfer cards is a good place to start there, you can compare offers and apply for a card that fits your needs.
Reasons A Personal Loan Could Be Better Than Your Credit Card Debt
by Matt Frankel, CFP | Updated July 21, 2021 – First published on Dec. 2, 2018
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In recent years, many companies, both new and pre-existing, have begun offering innovative and streamlined personal loan products, and millions of Americans have taken advantage. If youve been wondering if a personal loan is right for you, here are three reasons you may want to take a closer look at the offers available to you.
How Is Your Credit Score Determined
We talked about the three different credit bureaus and how they determine what your credit score is. However, that leaves a big question: just how is your credit score determined?
Its actually more complex than you might think. These bureaus look at five different major factors, though some are more important than others.
The first factor is your payment history. This is the biggest factor in your credit calculation, and it looks at whether you have repaid things like credit cards and loans back in a timely manner.
Things like late payments and missing payments really lower the score because they make you seem less trustworthy when it comes to borrowing money in the future!
The next big factor is your debt usage. Its okay if you have a small amount of debt , but large amounts make installment loans direct lenders worry that you have too much old debt to take on any new debt.
The next factor is surprising to some: how long your credit accounts have been active. This is why many people advise you to keep old lines of credit active, even if youre not using them. If youve had a credit card for many years and are in good standing with that lender, youll look trustworthy to a new lender.
A smaller factor they look at is your mix of credit types. This means theyll look at your revolving credit and debt. Its actually good to have a bit of both, so long as youve been making timely payments.
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You Want To Protect Your Credit Utilization
When you max out your credit cards, your credit score can go down because your utilization is really high. Typically, using 30% or more of your credit utilization doesnt look good on your credit report . But with a personal loan, your , allowing you to use your full balance without getting penalized.
If youre interested in a loan, its good to explore an online personal loan or a loan from a bank or credit union.
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How Do Loans Work
Personal loans can be used for large purchases, or to consolidate other debts. Loans are normally available from Â£1,000 up to Â£50,000 or more.
Lenders normally price loans in tiers. In general, the more you borrow, the lower the loanâs APR. APRs can be as high as 30% for loans of Â£1,000 but as low as 3.1% if youâre borrowing more than Â£7,500.
The APR and loan amount youâll be offered will depend on your credit score.
Browse market-leading deals and exclusive offers on ClearScore.See your loan deals.
How To Choose Between A Personal Loan And A Credit Card
Both personal loans and credit cards are financial tools that allow you to borrow money, and each can help you build credit when used responsibly. But loans and credit cards work very differently, so one may be better than the other for certain financial decisions. Deciding whether to get a personal loan or a credit card first depends on the types of purchases you plan to make as well as your financial situation.
How Personal Loans Affect Your Credit
Depending on how you use a personal loan, it can have a positive or negative impact on your credit score. When you apply for your loan, a hard inquiry will be placed on your credit report, which can temporarily decrease your score by up to four points. However, If you pay your loan back on time, it could improve your credit score. Using a personal loan to consolidate high-interest debt may lower your credit utilization ratio a key factor in determining your credit score which could also improve your credit.
Before getting a personal loan, make sure you can pay it back on time. If you miss a payment, the lender may report it to one of the three major credit bureaus: Equifax, TransUnion or Experian. Because payment history accounts for 35 percent of your credit score, this can cause serious damage to your credit.
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When Is Getting A Personal Loan A Good Idea And When Is It A Bad One
Whether taking out a personal loan is a smart financial move or one that could sink you deeper into debt depends, at least in part, on the reason you want a loan. Good reasons, like reducing or paying off credit card debt, can help you improve your financial health. Other reasons, such as buying things you cant afford, can increase your debt and end up harming your credit.
Either way, a personal loan isnt easy money or a quick fix. You should proceed with caution when getting a personal loan, even if its for a very good reason.
What Is A Personal Loan And Should You Get One
A personal loan is an amount of money loaned to an individual typically without any collateral. Though some lenders do require collateral depending on your credit situation. Though they used to be seen as a solution for people in dire financial straits, today the options and terms are better than ever and more and more everyday people are taking out personal loans.
A personal loan can be a great idea if you have outstanding credit debt and a less than stellar credit score. If you use the personal loan to pay off the credit card, you can improve your credit score by making on time payments of your personal loan.
Even if you dont have credit debt, taking out a personal loan and repaying it is a good way to establish positive credit, which will help you down the road when you apply for a car or house loan.
If you have multiple outstanding debts – or just one – at a high interest rate thats taking a real bite out of your paycheck each month, then a personal loan could really help out. Find a lender that can give you a personal loan with a friendlier interest rate, and then use that to pay off the other debts.
A personal loan can help you pay for home renovations, which can significantly improve the value of your home. This can really pay off if youre looking to sell the house in the near future, or if youd like to increase the value of your home in order to borrow against the equity.
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Ways To Pay Down Debt
We have focused a lot on the benefits of paying down debt. However, many consumers dont know the best way to start handling their debts.
The first step is to focus on one credit card at a time. If you have extra money to spend, dont spread it across multiple cards: try to knock out one balance at a time.
Once you have paid off one card, you can take the amount you previously paid on that card and put it towards a new card.
It probably goes without saying, but youll need to pay more than the minimum amount that is due. Otherwise, paying off the card will take years, and youll pay a ton of interest.
Feel free to take advantage of balance transfer credit offers. Getting a lower interest rate is always good, and if you get six months or so of zero interest, you can really put a dent in your debt.
Finally, start looking at your monthly budget. Use an app to keep track of how much you spend on various things. Cutting back certain spending can free extra money up for paying down credit cards.
Personal Loans Vs Balance Transfer Cards For Debt Consolidation
If youre trying to consolidate and pay off debt faster, you have two popular options a balance transfer credit card and a personal loan. Both solutions:
- Can reduce your interest rate
- May speed up debt repayment
- Have costs and pitfalls
Examine the pros and cons of personal loans vs. balance transfers. Before deciding, consider your own strengths and weaknesses.
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Other Ways To Pay Off Debt
One alternative way to lessen your debt load is to refinance some or all of your debt by moving it to a 0% balance transfer credit card . Another is to take out a personal loan with a lower interest rate.
For balance transfer credit cards, youll want to make sure you can pay off the full loan amount before the 0% period expires, as these cards tend to have high regular APRs. There are often balance transfer fees in exchange for longer 0% introductory periods. You can use WalletHubs free balance transfer calculator to see which card will save you the most money. And its only worth consolidating all of your debt in a personal loan if you can get an APR that is a lot lower than the APRs on both your credit card and your student loan. In both cases, balance transfer card and personal loan, youll need to make sure your credit limit or loan size can accommodate your existing debts.
You should also look into whether youre eligible for student loan forgiveness. If you work for the government or a non-profit, you may be eligible for Public Student Loan Forgiveness after about 10 years of payments . Otherwise, people with federal student loans may be eligible for forgiveness after 20 – 25 years, based on their income.
Most banks that offer personal loans require a credit score of at least 660. Some require even higher scores, like Citizens Bank and Barclays .
Easiest Banks to Get a Personal Loan From:
When Does It Make Sense To Use A Personal Loan To Consolidate Your Credit Card Debt
Personal loans which can be used as debt consolidation loans, depending on the lender tend to offer lower interest rates than credit cards. So, if youre juggling multiple credit card payments per month and paying high interest rates on that debt, it makes sense to consolidate your credit card debt into a single personal loan with a lower interest rate than what youre currently paying.
But keep in mind that most lenders typically have minimum loan amounts of $1,000 to $5,000. Because of this, personal loans may only be a good option if your debt lands within that range.
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How Personal Loans And Credit Cards Impact Your Credit Scores
Besides giving you money, personal loans and credit cards have an additional benefit: They can boost your credit scores. Making your payments on time every month will help prove that you’re doing a good job at managing your debt.
If you use credit cards, keeping your credit utilization ratio below 30% will also improve your credit scores. Your measures the percentage of revolving credit you have available that you’re actually using. The lower your ratio, the better.
A personal loan adds variety to your, which is one of the factors used to determine your credit scores. And if you use a personal loan to pay off credit card debt, you’ll reduce your credit utilization ratio.
Keep in mind that both personal loans and credit cards can also hurt your credit. Making late payments or missing payments can lower your credit scores, making it more difficult to get credit in the future.
You Could Get A Lower Interest Rate
One of the top reasons people consider personal loans is to save on interest. The average credit card APR is currently about 16%, and many people are paying much higher rates than that. If a personal loan is available with a significantly lower APR, it could save the borrower lots of money.
Heres an example. Lets say that you owe $20,000 across a bunch of credit cards and youre paying an average APR of 18%. If you commit to paying your debt off over a four-year period, youll need to pay $587 per month and will end up paying $8,200 in total interest.
On the other hand, if you can obtain a personal loan at 12% interest, a four-year repayment schedule would translate to a monthly payment of $526 and total interest of $5,280 — saving you nearly $3,000.
Heres one important thing to keep in mind as you start the process of shopping for a personal loan: Interest rates can vary dramatically among lenders — even the rates offered to the same borrower. A recent LendingTree report found that the difference between the highest and lowest interest rates the typical borrower is offered by personal lenders vary by a staggering 879 basis points . Thats a big difference, so its definitely worthwhile to take your time and shop around.
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What Are The Benefits Of Personal Loans
Personal loans offer several benefits, including:
Fixed interest rates:
Can be used to consolidate debt:
You can take out a personal loan to consolidate multiple kinds of debt, such as credit cards or other loans. Depending on your credit, you might get a lower interest rate than youve been currently paying, which could potentially help you pay off your debt faster.
Can cover large expenses:
If you need to pay for a large expense such as home improvements, medical bills, or a wedding a personal loan could be an option to get the cash you need.
Most personal loans are unsecured, which means you dont have to worry about collateral. However, because unsecured loans present more of a risk to the lender, an unsecured personal loan could be harder to qualify for compared to a secured loan.
Fixed Term Personal Loans Make It Easier To Stick To A Budget
The unexpected expense is budget kryptonite. It is much harder to stick to your savings goals when your monthly bills are inconsistent. A personal loan takes the guess work out of the equationthe amount borrowed, payments, and timeline for repaying are all known quantities. Your debt is steadily flowing in one direction.
With everything is in flux, making it difficult to know what your monthly bill will actually be. The psychology of credit cards makes it easy to overspend and get stuck in the minimum payment trap, prolonging your repayment schedule and wasting money on interest payments.
When you pay for an item with a credit card its easier to spend more money. McDonalds found that the average transaction rose from $4.50 to $7.00 when customers used plastic instead of cash. Those little extra expenses add up and siphon funds that could be earning interest out of your savings.
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