Check your wallet. Do you have multiple credit cards in there? If you pay off your balance each month, you may not give them a second thought. But did you know that interest rates on credit cards are at record highs? Before you apply for another credit card or use one you already possess to pay for an unexpected expense, consider the difference between a credit card and a personal loan to decide which one might be the best fit for your personal financial situation.
What Is a Credit Card?
Every day you probably see an ad for one credit card or another. They’re easy to apply for and often come with offers of same-day responses. Some offers don’t require minimum credit scores and income requirements can vary. However, lower incomes and lower credit scores often result in higher interest rates.
Most credit card companies offer variable interest rates, which means they could go up or down. If you pay off your balance each month, as financial advisors recommend, you may not pay attention to your interest rate. But if you only pay the minimum required each month, a variable rate that goes up will likely cost you money.
What Is a Personal Loan?
A personal loan gives you a specific amount of money in a lump sum. It comes with a fixed or variable interest rate and you pay it back in monthly installments within a set time period, usually between one and five years. You can apply for a personal loan at a bank, credit union, finance company, or through an online lender and request the amount of money you would like to borrow.
Main Differences Between Credit Cards and Personal Loans
Below are some differences between credit cards and personal loans:
1. Application Process
You can apply for a credit card at your bank or online. You will likely need to supply your Social Security Number, income, and date of birth. If you intend to add authorized users, you need their info as well. Most credit cards are unsecured, meaning no collateral is required, but secured cards, where you put down a deposit, are available if you have poor or no credit history. Approval is determined by individual companies based on internal requirements, your income, credit score, and credit history.
You can apply for a personal loan online or in person at a lending institution and may be approved within a few days. The lender will likely ask for more detailed information on your current employment, whether you rent or own your home, and your current salary. Lenders will also review your credit history and your debt to income ratio.
Personal loans can be unsecured or secured. The approval process might be quicker with an unsecured loan. However, because a lender’s risk may be greater without collateral, you may also pay a higher interest rate and there may be a lower limit on your loan amount.
Savvy borrowers research lenders to find the best interest rate, APR, and overall terms. You can get prequalified for a personal loan to see the rates a lender may offer you. Pre-qualifying will not impact your credit score, and you can compare rates offered by various lenders. You will also get an idea of what your monthly payments will be to see which loan option may be best for you and your circumstances.
2. Credit Scores
Typically, with a credit card, the lower your credit score, the higher your interest rate will be. There are cards available if you have a poor credit score or you can apply for a secured credit card. With a credit score of 670 or higher, you may have more lenders to choose from, offering better interest rates and terms.
3. Loan Fees
Credit card fees can include an annual fee, foreign transaction fees if you purchase something in a foreign currency, and over-the-limit fees if you spend more than your credit limit. There are usually no application fees for a credit card.
With a personal loan there may be origination fees, application fees and prepayment penalties. Find out ahead of time what these fees are so you can compare lenders and choose the one with the best overall offer.
Late fees may also apply if you do not make your credit card or personal loan payments on time.
4. Payback Period
With a credit card, you are approved for a certain dollar limit. Each month you will be required to make a minimum monthly payment and then you can spend up to your credit limit. If you pay the card off in full each month, there are no interest charges.
With a typical personal loan, you may have between one and five years to repay the loan with fixed monthly payments. Long-term personal loans are also available with loan repayment terms of up to 15 years.
Are you looking for a personal loan to cover an unexpected expense, a home improvement project, or maybe a family vacation? Contact Mariner Finance today. We’ll provide you with information that fits your unique needs.
