Exploring Four Compelling Reasons to Choose a Loan Over a Credit Card for Your Financial Needs
When you need to cover an expense but don’t have the cash on hand, you might think of using your credit card. However, depending on your debt and the terms of your credit card, this might not be the best choice.
A good alternative is applying for a personal loan. Personal loans can be either secured or unsecured and provide you with a lump sum that you repay in installments over a set period.
Personal loans are versatile and can be used for various expenses like repairs, renovations, medical bills, debt consolidation, or even wedding or funeral costs. Here are four reasons why a loan might be better than a credit card:
**Lower Interest Rates**
One of the main advantages of a loan over a credit card is the lower interest rates. Credit cards often have high APRs, especially for those with average or poor credit scores. In contrast, personal loans, particularly secured ones, usually offer lower interest rates, which can reduce your overall borrowing costs over time. For example, the average credit card interest rate is 22.75%, while the average personal loan rate is 12.35%, according to recent Federal Reserve data. However, if you have a credit card with a high limit and a 0% APR for 18 months and can pay off your debt within that period, it might be a better deal than a personal loan with a 12% interest rate.
**Fixed Repayment Terms**
Loans typically come with fixed repayment terms, making it easier for borrowers to budget and plan for monthly payments. With a credit card, the minimum payment can vary based on the outstanding balance, making it hard to predict future financial obligations. A loan provides stability and certainty, which helps with better financial planning. If you decide to use your credit card for larger expenses, avoid using it for anything else until you pay it off to prevent increasing the balance.
**Opportunity for Debt Consolidation**
For those dealing with multiple high-interest debts, such as credit card balances, a loan can offer a chance for debt consolidation. By consolidating debts into a single loan with a lower interest rate, borrowers can streamline payments, simplify their financial obligations, and potentially save money on interest charges over time.
**Potential for Higher Borrowing Limits**
Depending on the lender and the borrower’s creditworthiness, loans may offer higher borrowing limits compared to credit cards. This can be particularly beneficial for significant expenses like home improvements, medical bills, or education costs. A loan with a higher borrowing limit provides greater flexibility to address substantial financial needs without relying on multiple credit cards or incurring high utilization rates.