Three Reasons You Should Choose a Personal Loan Instead of a Credit Card

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When you need to buy something, it's tempting to use credit cards to finance your purchase. Depending on your situation, though, that may not be the best way to go. Here are three reasons why you should opt for a personal loan instead.

Lower Interest Rates

The top reason why personal loans are a better option than credit cards is they typically have lower interest rates. The average credit card rate is between 12.5 percent and 15.9 percent, while the average personal loan rate lands between 5.5 percent and 9.3 percent. That 7 to 10 difference in percentage points means hundreds of dollars in interest you'll avoid paying.

However, the interest rate you're charged does depend on your credit score. The lower your score, the higher your rate, and the difference in rates between personal loans and credit cards may be negligible at a certain point. In that case, you should look at other costs you may incur to use a credit card rather than getting a personal loan.

For instance, you'll be charged a fee every time you take out a cash advance from your credit card. This may be a flat fee (e.g. $10) or a percentage of the amount you withdraw (e.g. 5 percent), and you'll be charged the fee regardless of whether you take money out of an ATM or use the convenience checks your credit card company furnishes you. Additionally, it's not unusual for credit card companies to charge higher interest rates for cash advances than they do for purchases.

Therefore, it's essential you research all the fees you're likely to pay to get a true estimate of how much it will cost to use your credit card or a personal loan.

Easier to Get Approved with Bad Credit

Another way personal loans may be better than credit cards is it is often easier to get approved for one, even if you have bad credit. Credit cards are essentially unsecured loans, which mean there's no collateral backing the money you borrow. If you default on the account, the bank has no way to recoup the money it loaned you. This is why banks are so fixated on credit-worthiness when it comes to credit cards. The higher someone's credit score, the less likely the person will default on the account.

On the other hand, even if your credit is too poor to qualify for an unsecure personal loan, you can often still get a secured one backed by a car, piece of jewelry, or other valuable property you may own. Companies will take a chance on people with bad credit in this situation because they know they can recoup some or all their money by taking possession of and selling the collateral backing the loan.

While it is true secured credit cards exist, it doesn't make sense to apply for one in a situation where you need money to make a purchase. Secured credit cards require you to deposit cash in an account to serve as collateral for your credit line. That's money you could use to help you pay for whatever it is you need the loan to buy.

Less Temptation to Buy More

Credit cards are considered revolving accounts. Any payment you make on the card immediately frees up credit you can use to make more purchases. On the other hand, a personal loan is an installment account. Each payment you make only reduces your balance. Once the loan is paid off, the account is typically closed and you would have to reapply for another one if you need more money.

It's important to know the difference because, if you want to avoid the temptation to keep spending money, then you should opt for a personal loan. Credit cards make it too easy to maintain a high balance, which can have an adverse affect on your credit score.

Personal loans, on the other hand, make it easy to remain disciplined with your spending, which is good for people who are trying to overcome financial difficulties.