Fast track your home purchase with zero down payment
June 23, 2017
Help Us Give Back With a Holiday Toy Drive
December 8, 2017
HOW TO CHOOSE BETWEEN A LOAN AND A CREDIT CARD
September 8, 2015
Unexpected expenses happen: The car needs a new transmission, the roof leaks or someone in the household needs costly medical treatment. If you don’t have an emergency fund set aside for such events, getting a loan or putting it on your credit card are sometimes the next best options.
Credit cards and personal loans have several common characteristics, but they
aren’t exactly the same. Knowing the best times to rely on each can help ensure you’re using your money in the smartest way possible.
WHEN TO PUT IT ON YOUR CREDIT CARD
Credit cards are sort of like small loans taken out at the time of purchase. You’re given a dollar limit and are required to make monthly payments on your balance. The minimum payment required can fluctuate, as can the interest rate, depending on the card.
So when does it make sense to put expenses on a credit card? When you can pay them off quickly. This is especially true if you can take advantage of a 0% credit card offer.
Interest-free credit cards allow you to avoid interest for an introductory period, generally 12 to 18 months. If your anticipated expense doesn’t amount to more than 30% of your credit limit (passing that percentage can hurt your credit score) and can be paid off during this interest-free period, using a credit card could be your best option.
WHEN A LOAN MAKES MORE SENSE
Personal loans are lump sums of money that you borrow from the bank or credit union. Normally, they are unsecured, meaning you don’t have to put up collateral. They also typically come with fixed, monthly payments and a fixed interest rate.
Taking out a personal loan makes sense when you don’t anticipate paying off the debt all at once and you don’t have access to an interest-free credit card, as the interest rates on personal loans are generally lower than those on credit cards.
Loans are also most appropriate for larger expenses — major home improvements and medical procedures, for example.
If you’re leaning toward a loan, don’t forget about origination fees. Many lenders charge a fee for taking out the loan, normally between 1% and 5% of the total amount of the loan, depending on your credit. This could end up being a considerable addition depending on the amount you’re borrowing.
WHATEVER YOUR CHOICE, PLAY IT SAFE
Whether you choose to charge it or borrow the money from a bank, make sure you have a plan for paying off your debt. You don’t want to stretch yourself too thin and wind up struggling to make monthly payments. Don’t just choose the option that best meets your current need for money; choose the one that reflects your future ability to pay.