Saturday, February 26, 2011

Whats Better a Personal Loan or a Credit Card?

You want to paying off your debts in the most economically way. You have a choice between an old fashion unsecured personal loan from your bank or a credit card. Which do you use?

The Good.

With the personal loan you have a fixed interest rate and you make regular monthly payments over time, maybe 3 or five years. No variable rates. No confusing rules. You don't risk your home as with a home equity loan. If you default, you will just have to deal with a collection agency.

Among the banks promoting personal loans now: Wells Fargo, Discover Financial, Citi and CapitalOne. Wells Fargo says that it will lend from $3,000 to $100,000 for a term as long as five years. From Citi, you can borrow from $300 to $7,500. The banks keep the rates top secret until you apply, because they are “risk-based” — in other words, they vary according to your credit score.

The Bad.

The interest rates you will encounter on a personal loan will be between 10 and 15 percent. It will never change like credit cards can if you miss a payment.

With credit cards you could swing a zero or low interest balance transfer, beating the rate for a personal loan. You also have the flexibility to just make the minimum payment if one month the car breaks down and you need the money. Even if you can't get the low interest credit card balance transfer and just get your regular rate you still have more flexibility.

What about fees? With personal loans there is a an origination fee, of on average between $50 and $100 dollars, but with the credit card balance transfer you also have a fee which is between 3 and 5 percent of the loan amount.

The Ugly.

Now comes the best part, the psychology. How many times have you vowed to pay $500 on your bankcard balance transfer only to wimp out and pay $300 because you spent too much at Starbucks that month — or eating out. The $200 you didn’t pay stayed on your balance and accrued more interest for the bank. A payment, by the way, for a $10,000 loan for five years at 15% would be $238 a month.

The bottom line is credit cards have flexibility and personal loans don't. The flexibility has it's benefits and it's problems. If your undisciplined you could always just pay the minimum and also run the balance up again.

With the personal loan the discipline is built in, you have a fixed payment with a fix time frame. You could be paying higher interest for this benefit.
Reader: Which type of loan do you think is better?

2 comments:

  1. The post ahs discussed what is better personal loan or credit loans. Useful post

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  2. Well, I read your entire post and found it interesting. You have mentioned why the credit cards are better than the personal loans. Both have their own good and bad points. Using credit cards, one can get the amount as required, but he/she has to pay higher amount if the limit is crossed which can disarray the monthly budget. In the personal loan, one gets a fixed amount at once and has to pay a fix amount within fix time frame which is not a problem when he/she has a good flow of money. For more personal loans related information and to apply for one, visit http://www.quickcredit.com.sg/loan-services-singapore/personal-loan-in-singapore

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