Most of us know well that any form of credit can land you into hot water if not used wisely and controlled well. However what happens if you do need to borrow a small amount now and then to be used to make ends meet or for some unforeseen expenses.
Are Personal Loans Always Cheaper than Credit Cards?
Historically speaking the interest rates offered on most credit cards are higher than the rates on personal loans. However before making an overall judgements as to which form of credit is cheaper, it is important to consider the fine detail.Some financial experts believe that while personal loans can force consumers to better control their spending, credit cards can be cheaper if used correctly.
When are Credit Cards Cheaper?
This is mainly because both forms of credit have fees and charges associated with their use. However credit cards generally offer an interest free period to their user. Therefore if you are in a position to fully repay the debt you have put on your credit card by the end of the month – you will find that you have paid nothing for the privilege of using this form of credit. Also some credit cards ( Visa , Master Card, etc )offer a reduced interest on 0% interest for several months for debts rolled over from other cards. These cards can save you quite a bit of money if used correctly.
Personal loans on the other hand, have a fixed period of time and fixed repayments. You cannot take out a personal loan and pay no interest on that loan. You will be charged interest from day one, even if this interest rate is a little lower than the rate applied to your credit cards, that’s how finance works.
So how do you Select which is Best?
It is important to analyze your spending habits and consider how you intend to use both forms of credit.When choosing a credit card try and select one with the lowest interest rate in preference to one that offers either rewards or other supposed benefits. There are cards out there with interest rates not to dissimilar to those of personal loans.
For example, a consumer who borrows $5000 and makes monthly repayments of $450, the cheapest option would be to use a credit card with the introductory offer of 0 per cent on purchases in the first six months, before reverting to a low ongoing rate.
However in general the average costs to the borrower using a personal loan or a credit card to access $5,000 worth of credit are fairly similar.However if you are able to apply to reduce your debt sooner than the 3 – 5 years you are offered with a personal loan then borrowing using a credit card may be more advantageous.
Also for larger purchase such as a motor vehicle or a new kitchen, a personal loan may work out cheaper than a credit card.Personal loans n effect force the borrower into a structured repayment plan ensuring that you repay both the principal and the interest. This is great for borrowers who lack discipline.
Such borrowers can quickly acquire credit card debt and only pay a minimum interest on each without ever making any effort to repay the principal.Therefore if you lack discipline when it comes to making debt repayments and paying out your debts your best choice is a personal loan as this product in effect ensures that your debt is fully repaid after a set period of 3 to 5 years.