5 reasons to choose a personal loan over a credit card
There comes a time in life when you need to borrow money fast. Perhaps you need to pay for an emergency medical procedure, your car’s broken down, or you need to get something important done.
At that point, you may prefer to use your credit card to get the money you need and deal with your balances later. Swiping your credit card to pay for whatever expense you’re dealing with may be easy, but it’s not always the smartest choice. Credit card debt is costly, and it can take a long time to pay off.
If you’re facing an expense that you can’t cover with your savings, consider taking out a personal loan. In some situations, personal loans come with a few advantages that make them a better choice than credit cards.
Offers low-interest rate
Credit cards are infamous for charging high-interest rates on carried balances. As of April 2022, the average credit card interest rate is 16.36%. What does this number mean? For example, if you have a credit card with a $2,000 balance and an interest rate of 16.36%, you’ll be charged $327.20 in interest every year. That’s more than $27 per month!
But with a personal loan, lenders usually offer low-interest rates. Hence, making them a much better option for you to borrow. And it’s particularly true for applicants with a strong credit score.
The higher the credit score, the lower the interest rate. That’s because a high credit score is an indicator of low risk. Plus, it tells lenders that you’re more likely to repay the loan on time. So, if you’re looking to borrow money and want to avoid high-interest rates, a personal loan is the way to go, and having a solid credit score will qualify you for the best rates.
Avoid major credit score damage
The lender conducts a hard credit inquiry when you apply for a personal loan, and it can stay on your credit report for up to two years. Your credit score could drop by 5-10 points as a result.
You should expect this hit if you take out a personal loan. On the other hand, if you accrue too much credit card balance, it could put your credit utilization ratio into an unfortunate place and damage your credit score more than a hard inquiry may cause.
If you choose between the two, a personal loan is better. Imagine what could happen if you can’t make your credit card payments on time. Your interest rate would skyrocket, you would start accruing late fees, and your credit score would nosedive.
Hard inquiry isn’t something to worry about if you take a personal loan. However, the damage done by maxing out your credit cards is worse.
Fixed monthly payments
Another benefit of taking out a personal loan is its predictability. You know exactly how much you’re borrowing and your monthly payments with a personal loan. In addition, fixed monthly payments make it easy to budget for your loan. Since personal loans have a set repayment schedule, you can also pay off your debt early without penalty.
Unlike credit card debt, which can fluctuate with changes in your interest rate or spending habits, personal loans give you the peace of mind of knowing exactly when your debt will be paid off. Ready to get a personal loan? Check out creditninja.com to find the best option for yourself.
Wide range of uses
Unlike credit cards, where the money is limited to what you have available in your line of credit, personal loans are typically given in a lump sum. So, you can use it all at once or in increments, as needed.
You can use a personal loan for various purposes, from consolidating debt to financing a large purchase.
Helps build credit
Taking out a personal loan requires making monthly, regular payments on the loan’s principal and interest. Lenders report your payment record to the credit bureaus.
If you make prompt, regular payments on a personal loan, it will boost your credit score. Payment history is one of the most crucial factors in determining your credit score. It accounts for 35 percent of your FICO score.
So, if you’re looking to improve your credit score, a personal loan can be a helpful tool. Just make your payments on time and in full each month.
A personal loan allows you to borrow cash for any reason. Need to consolidate debt? Make home improvements? Cover an emergency expense? A personal loan can help. So, before you swipe your credit card, consider a personal loan. The benefits may surprise you.
Story by Tiffany Wagner