In today’s tough economic times, many people have to search for ways to obtain money when unexpected financial emergencies arise. Two common choices for getting quick cash involve taking out a personal loan and using a credit card.
Depending on your specific situation, either one of those could be a viable option for you in times of need. Here are some of the advantages and disadvantages of personal loans versus credit cards and when you should use one instead of the other.
- How much money do you need?
If you need just a small amount of money to tide you over, that little plastic credit card might be a better choice to use. Many financial experts recommend charging amounts below $2,000 to credit cards.
For expenses over $2,000, a personal loan, also called a signature loan, might be a better option for you. Remember that you can compare loans at MoneySupermarket to find the best personal loan for your situation.
- How much interest will you pay?
Credit cards can be a good choice to use in emergency financial situations but only if you can pay back the full amount due before you start accruing interest.
If you can’t pay the balance in full, the amount you still owe carries over to the next billing cycle. Try to use credit cards that offer a no-interest or low-interest introductory rate for those smaller financial emergencies.
Interest rates on personal loans are typically lower than the normal interest rates on credit cards. If it will take you a while to pay back the debt, use a personal loan to save you money on interest.
Another advantage of a personal loan is that the interest rate and the amount of your monthly payment will never vary, even if you miss a monthly payment. Credit card companies frequently jack up your interest rate dramatically if you run late on just one payment.
- How quickly do you need the money?
Obtaining a personal loan can take some time. It usually takes at least several days for loan managers to even look at your application and several days more for approval.
If you already have a credit card that is under its credit limit, it would obviously be faster to just use the card. You can access the cash whenever you need it.
- How long do you want to be in debt?
When you apply for a personal loan, you usually select the amount of your monthly payment and the length of your loan repayment period upfront. This allows you to know how much progress you are making toward paying off your debt.
With credit cards, however, many people find themselves stuck in the minimum monthly payment trap. If you make just the minimum required monthly payment, you won’t ever make any headway on your balance and you’ll end up throwing your hard earned money away on finance charges.
In summary, credit cards are often the best option if you need a small amount of funding, plan to pay off the debt quickly or if you need the extra money fast. Personal loans are generally a better choice for larger amounts of money or if it will take you a while to pay back the debt.
Whichever financial option you choose, take the time to compare the various offers available to you. Always be realistic in terms of what you can actually afford and how quickly you can pay off the loan.
