When to use a personal loan on a credit card

Make sure you know when a personal loan will offer better solutions to your financial needs than a credit card. (iStock)

Sometimes it’s hard to know if a credit card or a personal loan is the right choice for your current situation. While both options have their pros and cons, a personal loan is usually a better solution.

Credit cards offer a revolving line of credit, which means you can access funds whenever you have credit available. Still, they often come with higher interest rates and monthly payments vary.

Personal loans offer a lump sum of cash. Personal loans often offer lower interest rates and most lenders offer fixed monthly payments. Some lenders will allow you to take out more than one personal loan at a time, but that depends on the lender’s rules and your credit history. Those with bad credit may have more restrictions or not get the lowest rates.

When looking for financing, be sure to explore your personal loan options. Visit Credible to compare the rates of several lenders and start the application process.

If you can’t decide which option is best for you, here are some situations where a personal loan is probably a better option than a credit card:

WHAT TO DO BEFORE APPLYING FOR A PERSONAL LOAN

Make an expensive purchase (like a car)

Unless you have a high credit limit with a very low interest rate, a personal loan is likely to offer better terms and more competitive rates. Personal loan amounts vary widely. You can use a loan to cover many expenses, including buying a car, medical bills, home repairs, or travel.

Expensive purchases can cost several thousand dollars. The loan rate could increase your overall purchase cost by hundreds more, and your payment could change from month to month.

For example, suppose you make a purchase of $ 5,000. The interest rate on your credit card is 16% (a little lower than average). If you do a monthly payment of $ 150 per month, it would take you about four years to pay off, and you would pay $ 1,657 in additional interest.

Now let’s say you have taken out a $ 5,000 personal loan at 9% personal loan rate with a four year repayment plan. It would take you another four years to pay off the debt, but your loan repayment would be $ 124 and you would pay $ 972 in interest. The personal loan could save you $ 685 in interest.

Those with excellent credit or a better credit history will get the lowest rates. You can use a personal loan calculator to compare rates and find the best deal.

Debt consolidation

Personal loans are a great option when you need to consolidate multiple high interest debts into one payment. Besides saving money on higher credit card rates, streamlining your monthly payments makes budgeting much easier.

Using a personal loan to consolidate your debt can help you improve your credit score by lowering your debt ratio. Plus, paying on time will also help boost your credit score. An added benefit of consolidating debt with a personal loan is that you extend your loan repayment period. If you’re having trouble repaying your loan, debt consolidation can help you reduce your repayments and extend the time you have to pay off what you owe.

Remember, if you’re using a personal loan to consolidate debt, don’t start spending on your credit cards again. You could end up in a much worse financial situation without responsible spending.

Using a loan for debt consolidation is an easy way to free up additional cash. Visit an online marketplace like Credible to access your personal loan rates.

5 SMART WAYS TO CONSOLIDATE CREDIT CARD DEBT – AND 5 YOU SHOULD NEVER DO

When you need fixed payments to fit your budget

Credit cards are convenient, but the monthly payment changes depending on how much you owe and how much your interest rate increases. If you want to live on a budget and know exactly how much you’ll pay each month is important to you, going for a personal loan is your best bet.

When you take out a personal loan, your lender will likely offer you a fixed repayment term (usually one to five years). Your total loan, plus interest, is spread over the total payments. This allows the lender to offer you a fixed payment each month.

HOW MUCH DO YOU PAY FOR A $ 40,000 PERSONAL LOAN?

The bottom line

Personal loans are a great option if you want to make a large one-time purchase, consolidate debt, and have fixed monthly payments. Before applying for a personal loan, be sure to visit Credible to get in touch with experienced loan officers and get your personal loan questions answered.

Have a financial question, but don’t know who to ask? Email the Credible Money Expert at [email protected] and your question could be answered by Credible in our Money Expert column.


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About Joan Ferguson

Joan Ferguson

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