We all grew up hearing the ancient advice: that it’s always best to save – and very few people would argue against this eternal wisdom.
However, the reality is that it is not always possible to save. In fact, often we find ourselves short of cash to pay for necessities. And for those times, you might need to decide which type of financing wins in the battle between a personal loan versus a credit card.
Both options can help you get the money you need, but under very different terms. For example, a credit card and a personal loan are both good credit choices when it comes to financing your needs.
However, they shouldn’t be used interchangeably, and deciding which type to use depends on your situation.
So, how do you know?
Here’s a look at how they compare and when it’s appropriate to use them.
According to experts from Old Mutual, credit cards are a good choice if you are looking for a short-term solution that you’ll pay off as you go, while personal loans are best when you need long-term financial assistance for larger purchases.
The right choice for you will also depend on your situation.
Below we take a closer look at each of these options.
Credit cards:
The main advantage of a credit card is its ability to help people establish a credit score. But they can also quickly become a financial burden if used irresponsibly. Credit cards generally come with high interest rates after the “no interest” window periods, which means they definitely won’t serve your well as a long-term loan.
How do they work?
When you get a credit card, a limited amount of money is made available to you. This amount is based largely on your credit score and how much you earn. When you spend money on your credit card, you will have a due date on the repayments. By sticking to only the minimum payments, you risk putting yourself in a position where you’d struggle to pay your debt off in the long term. Besides that, the additional interest will increase the cost of your credit.
Personal loans:
Personal loans are given by banks and other financial institutions (avoid loan sharks) and need to be paid off in instalments every month. The amount you are expected to pay will be predetermined and based on the term of your loan (you may have two years to pay it off, for example). Keep in mind that you will pay more on a loan that has a longer term and that the total cost of a loan will be the principal amount plus interest and admin fees.
How they work?
Personal loans are relatively easy to obtain. Generally, you can apply in person or online, but the bank will require a number of different documents from you in order to process the application. Typical requirements are payslips, copies of your ID and your personal and employment information. Interest rates on personal loans are usually lower than on credit cards as they are adapted to the risk posed by the lender (based on the borrower’s credit score).
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