Personal loan vs. credit card: what you need to know

Credit cards versus installment/personal loans

If used wisely, credit can be a beneficial financial tool that allows us to pay for expenses we need with convenient monthly payments. Credit can also make life less stressful when we need to pay for unexpected costs and emergencies. But what types of credit are out there?

There are a myriad of credit and loan applications floating around out there including two of the main ways that we can borrow money quickly and easily: credit cards and installment loans. While these can be an easy and fast way to access money, both come with their own set of advantages and disadvantages. Be smart when you borrow money and enlighten yourself on the best choices and how it may vary for different circumstances.

Credit Cards

While some people don’t think of a credit card as a loan, it is actually like taking out a little personal loan each time you use it. You have an established credit line or limit and you borrow against it. As long as you haven’t hit your limit, you can keep borrowing and keep repaying it. This is also known as revolving debt. There is a payment due at the end of each billing cycle. If you pay the balance by the payment due date, then no interest is charged. If there is a remaining balance, then interest is
charged until the debt is paid off. The longer you wait to pay off the balance – the more the interest will grow or compound.

Pros:

• Convenience: You don’t have to worry about carrying cash.
• Rewards: Some cards offer rewards for travel and/or cash back.
• Online shopping: Virtually all online merchants accept credit cards.
• Expense tracking: Provides a record of monthly spending.
• Cover emergencies: Credit cards can help cover unplanned expenses.

Cons:

• Temptation: Credit cards make it easy to overspend and most issuers require a much smaller minimum payment than what your overall balance is.
• Higher interest rates: Watch for low introductory rates that often increase later.
• Compound interest: If you carry over a balance, your interest will continue to grow.
• Fees: Some cards have annual fees, balance transfer fees, and over-the-credit-limit fees.
• No end date: There is no fixed end date to your debt.

Installment/Personal Loans

Another way to borrow money is through an installment loan, also known as a personal loan. They are used to borrow a fixed amount of money all at once and repay it in fixed monthly payments or installments over a period of months or years. Personal loans can be a great way to borrow a sum of money upfront and then schedule to pay it off over time with monthly payments that you know you can afford. They also can be a good way to consolidate debt into one easy-to-manage monthly payment.

Pros:

• Consistency: You know your monthly payment amount, interest rate, and your end date.
• Higher borrowing limit: Pay off a big purchase a little at a time.
• Versatile: Can be used as cash for home large ticket purchases and debt consolidation.
• Reduce financial stress: Can help consolidate debt into one easy-to-manage payment.
• Savings: Can help monthly budget with lower payment and less interest.

Cons:

• Possible penalties: Some loans charge pre-payment penalties.
• Possible fees: May have origination fees.
• Possible re-accumulation: You run the risk of re-accumulating debt on your credit cards that you paid off with the installment loan.

No matter what type of loan you choose, find out about the fees, terms and possible penalties before you borrow. Remember to always make the payments on-time to protect your credit score. And, never borrow more than you know you’ll be able to repay at a later date. Credit is only a helpful tool when it is used wisely and you act responsibly about borrowing and repaying any debt in a timely manner.