When Should I Use a Personal Loan Instead of a Credit Card?

Man holding a credit card while working on his laptop

If you’re wondering how personal loans and credit cards affect your interest rates and monthly payments, we have the information for you.

Read on to see how personal loans and credit cards differ from one another and the pros and cons of each.

Credit Cards vs. Personal Loans

Credit cards can be extremely helpful to pay for everyday expenses like gas or groceries. They give you a financial freedom that you can’t get from just cashing your weekly paycheck. However, credit cards can also be difficult to manage if you have trouble controlling your spending.

According to RocketLoans, a personal loan is an unsecured installment loan with a fixed interest rate that is repaid in equal monthly payments.

So personal loans are a great option to pay off debts, like credit cards, while limiting the amount of total interest you pay. You could also use personal loans to make home improvements or major purchases.

A RocketLoans personal loan provides you with a simple automated process to get your money into your bank account quickly and efficiently.

Interest Rates

The greatest advantage to getting a personal loan over using a credit card is having a lower interest rate.

Credit card interest rates will typically be in the 15 – 20% range, depending on your credit score. A personal loan would offer an interest rate around 10%. It may not seem like a huge difference, but that 5% can add up quickly.

A loan amount of $15,000, making minimum payments, would take 36 months to pay off with a personal loan at 12.5% interest (15.742% APR), and result in paying about $3,064.96 in interest. That same $15,000 with a credit card interest rate of 17.99% would take 253 months to repay making minimum payments, and cost over $14,000 in interest!

Some credit cards will offer a 0% APR for the first 30 days of a balance transfer. Obviously, if you’re able to find an offer like that, you can save loads of money on interest. But, like everything else, there are some drawbacks. In order to take advantage of the low-interest balance transfer, credit card companies will often charge you 1% – 2% on your transfer. After the initial 30-day period of zero interest, rates skyrocket, sometimes as high as 25%. So make sure you’re aware of the terms before signing up for a balance transfer.

Monthly Payments

Since a personal loan has a closed end to the term, the minimum monthly payments are usually higher than a credit card. You’re paying off the balance faster, which means you’ll pay less unnecessary interest. Also, having a set term to your balance means you can set your monthly budget knowing how much will go towards your loan.

Credit card monthly payments will be around 1% – 2% of your total balance. While this does make for a lower payment, in the long run you’ll end up paying substantially more in interest throughout the life of your credit card. Since your balance fluctuates often with a credit card, the payments will, too. So your monthly budget may be affected by the changing minimum payments and be more difficult to keep track of.

If you’re interested in a personal loan, our Personal Loan Experts at RocketLoans are here to answer any questions you may have about the process, your loan or anything else you can think of! Apply for one of our loans online today.

Have any questions? Share in the comments!

The post When Should I Use a Personal Loan Instead of a Credit Card? appeared first on ZING Blog by Quicken Loans.

Source: Home Loans

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