Don’t use the wrong borrowing method to finance your purchases.
- Personal loans can be a better way to finance purchases than credit cards.
- A personal loan can make sense if you can get a lower interest rate.
- It may also be a better choice if you want a more predictable payment schedule.
If you need to finance a big purchase, chances are you have two options. You can use a credit card to charge for the item and pay it off over time, or you can take out a personal loan.
Taking out a personal loan can take more effort than just swiping a card because you have to apply for it and get approved. But it might also be the best approach to covering your purchase costs in many situations. Here are four key signs that a personal loan might be a better choice.
1. You can benefit from a lower interest rate on a personal loan
When borrowing for a purchase, you always want to pay the lowest amount of interest possible over the life of the loan. Sometimes a credit card may allow you to do this if you qualify for a 0% APR card and the card balance will be paid off before the promotional rate expires.
But in other cases, you either cannot qualify for a card that offers no interest on purchases, or the 0% APR rate would only be in effect for a short period of time during your payment schedule. full refund.
In these circumstances, a personal loan with a low fixed interest rate may be a better solution for you since it will allow you to pay as little as possible in financing costs.
2. You need a large sum of money
Many personal lenders allow you to borrow large sums of money. For example, if you are financing a large purchase and need to borrow $50,000 or $100,000, it is extremely unlikely that you will have access to such a large line of credit on a credit card.
But, depending on your credit score and income, it can be easy to find a personal lender willing to make such a large loan.
3. It will take time to pay off what you owe
Personal loans can have relatively long repayment terms. For example, you might be able to apply for a personal loan that you can repay over five years or more.
If you need a long time to repay your borrowed funds, any 0% APR promotional rate on a credit card would be long expired by the time you were debt free. If you try to use a credit card instead of a personal loan, you’ll probably end up paying high interest for a long time.
With a personal loan, on the other hand, you could benefit from the same affordable rate for the duration of the multi-year repayment period. Your loan could end up costing a lot less.
4. You want to know the total costs and when your purchase will be refunded
Personal loans with fixed interest rates are predictable. When you borrow, you’ll know exactly what your monthly payment will be and exactly when you’ll be debt-free. This is often not the case with a credit card, as many cards have varying rates. Credit cards also allow you to pay low minimums and continue to charge more while you pay down your balance, so making progress in paying down your debt can be difficult.
If you prefer more predictability and are making a larger purchase that will take time to pay off, a personal loan is often the right financing tool to use. Of course, you’ll have to consider your own circumstances when making your choice, but don’t assume that looking for a card is always the right decision.
The Ascent’s Best Personal Loans for 2022
The Ascent team has scoured the market to bring you a shortlist of the best personal loan providers. Whether you’re looking to pay off debt faster by lowering your interest rate or need extra money to make a big purchase, these top picks can help you reach your financial goals. Click here for the full rundown of The Ascent’s top picks.