Personal Loan vs Credit Card for Big Purchases

Either a personal loan or credit card can be used to pay for a big purchase. Which is the better choice? Let's look at what each has to offer.

Personal Loan vs. Credit Card: Interest Charges

In today's market, the interest rate on a personal loan is significantly lower than those charged on a credit card. Interest rates vary depending on the bank, state, amount, term, and your credit score. The average personal loan rate is 7.25%.

The average consumer credit card rate is 14.67%, although it's still common to see credit card interest rates over 20%.

If you have a credit card that has a low or no interest rate introductory period or some similar type of promotion the credit card can be a better option than a personal loan, providing you are confident that you can pay off the balance before the offer expires.

If you cannot pay off the balance before the offer expires the interest rate will return to the regular rate on the credit card and the personal loan will become the better option.

These promotional offers can run anywhere from a month to a year. You must take this into consideration to ensure that the deal really is what it seems. Short term credit card promotions are not a good choice on big purchases, instead opt for a personal loan.

Personal Loan vs. Credit Card: Fees

Personal loans can have an application fee between $50 and $100. Credit cards do not have this fee. Both a personal loan and a credit card could have an annual fee associated with it.

Personal Loan vs. Credit Card: Borrowing Period

How long you borrow for has a direct impact on what the cost of borrowing will be. A personal loan is for a specific amount of time and will have a specific interest cost associated with that time period. There is often a penalty for early payout of the loan so be sure to ask your lender.

On the other hand if a credit card is used it is a running balance. As long as the monthly payments are made your obligation to the credit card is met.

If you know that you will be able to pay off the debt in a short period of time a credit card with a reasonable interest rate is a good choice because there will be no penalty for payout.

If you are unsure when you will be able to pay of the debt a personal loan is your better option with a lower interest rate.

Your Spending Habits

Whether a personal loan or credit card purchase is right for you depends a great deal on your spending habits. If you are a diligent person that has no trouble paying your debt, and you like to pay things off quickly, a credit card can be your best option.

If you are compulsive, tend to overspend, don't always pay your debt on time, and seldom pay off anything quickly, then a personal loan is better because of the lower interest rate and the structured payment plan.

Personal Loan vs. Credit Card: Convenience

A personal loan is more time consuming to obtain than a credit card. You must make an appointment with the lender, fill out the appropriate paperwork, and then await the approval. Where as your credit card is already in your wallet, and all you need to do is pay for your purchase. The credit card also lends itself to more impulsive purchases.

Personal loan and credit card purchases each have pros and cons. Use your personal situation to decide what is right for you.

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