When you’re hit with an unexpected expense, such as a vehicle breakdown, a big medical bill, or the need to make a major purchase, funds may be tight. You may need to use a credit card or take out a personal loan. Both options give you a way to handle the unexpected expense, but the best choice depends on how much you need and how soon you need it. Are personal loans cheaper than credit cards? Let’s find out.
In most cases, the interest rates on personal loans are lower than those on credit cards. There are times when a credit card may offer a promotional low-interest rate or even a zero-percent interest rate for a period of time. Whether the promotion would work for you depends on how much money you need to borrow and how long it’s going to take you to pay it back. A promotional rate is beneficial if you’re able to pay it back before the promotional period is over, but if you still have a balance when the promotional period ends, your interest costs can quickly overtake what you would pay on a personal loan.
How Long It Takes to Pay it Back
The amount you need to borrow and how long it takes to pay it back affect how much money you’ll pay in interest over time. A personal loan divides what you owe into installments, and once you have paid all the installments, that expense will be behind you. A credit card allows you to pay only a small portion of what you owe each month if that’s all you can afford, and if that’s all you pay, the balance continues to accrue more interest, adding to the amount you owe the creditor.
Payments on a personal loan are steady and predictable. The payments on a credit card can fluctuate based on your total balance. If you don’t pay more than the minimum amount due, it will take you quite a bit longer to pay back your debt.
Credit Card Advantages
There are some advantages to financing an unexpected expense on a credit card. You may be able to earn rewards or travel points for using the card. If you’re able to pay the balance in full in a few weeks, you may not have to pay interest at all. If you already have a credit card with sufficient funds available, you won’t have to wait for loan approval or for funds to be disbursed.
The Best Options Require Good Credit
Whenever you apply for a new loan or credit card, getting the best rate and terms depends on having good credit. Even if you know you always pay your bills on time, before applying for new credit, check your credit reports to make sure they’re accurate. Errors on a credit report can bring down your score and cost a lot of money in interest charges over time.
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