Low Interest Small Personal Loans – Personal loans and credit cards both offer a way to borrow funds and have many of the same provisions of standard credit. In both loan and credit card agreements, you will typically find funds offered by the lender with a specified interest rate, monthly payments that include principal and interest, late payments, underwriting requirements, amount limits , and more. Mismanagement of any type of credit can undermine your credit rating, causing problems with loans, access to good housing, job hunting
But in addition to the similar attributes that share personal loans and credit cards, there are also fundamental differences, such as repayment terms. Let’s explore the definitions and differences between the two, along with some pros and cons of each.
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Before we move on to compare the differences between personal loans and credit cards, it is important to understand one of the big similarities. The United States and most countries have integrated a credit scoring system that forms the basis for credit approval. The top three US credit agencies—Equifax, Transunion and Experian—are the leaders in setting credit scoring standards and work with lenders to enable credit approval.
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Credit scores are based on a person’s past credit history, including bad debts, inquiries, bills, and outstanding balances. Each individual is given a credit score based on this history which greatly influences their chances of credit approval. Collectively, all the factors considered by the lender can also affect the interest rate the borrower pays and the principal amount for which they are approved.
Both personal loans and credit cards can be unsecured and secured, which also affects the terms of the credit.
Both paying off your credit card balance and repaying your personal loan on time can help build your credit score.
Lenders offer a variety of options in the personal loan category that can affect the terms of your credit. In general, the main difference between a personal loan and a credit card is the long-term balance. Personal loans do not offer continuous access to funds like a credit card does. The borrower receives a lump sum up front and has a limited amount of time to repay it in full, through scheduled payments, and retire the loan. This arrangement usually results in lower interest for borrowers with good to high credit scores.
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A personal loan can be used for many reasons. An unsecured loan can offer funds to finance a large purchase, consolidate credit card debt, repair or upgrade a home, or provide financing to fill a gap in income. An unsecured loan is not secured by collateral posted by the borrower.
Home loans, car loans, and other types of secured loans can also be considered personal loans. These loans will follow standard credit approval procedures, but may be easier to obtain as they are secured by an asset pledge.
In a home loan or car loan, for example, the lender has the right to repossess the home or car after a set number of defaults. Secured loans usually have slightly better terms because the lender has property rights involved which reduce the risk of default. Here are some pros and cons of personal loans.
Keep in mind that interest is not the only cost to consider in a loan. Lenders also charge fees, which can add to the total cost of a loan. Personal loans typically include an origination fee and may have other fees as well.
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A notable distinction is the difference between a line of credit (LOC) and a loan. Unlike a loan, a line of credit has inherent flexibility, its main advantage. One downside is that it typically comes with higher interest rates.
LOC is a preset loan amount, but the borrower does not have to use it all. The borrower can access funds from the line of credit at any time as long as they do not exceed the terms of the credit limit and other requirements, such as making timely minimum payments.
A LOC can be either secured or unsecured (most are the latter) and is usually offered by banks. An important exception is a home equity line of credit (HELOC), which is secured by the equity in the borrower’s home.
Credit cards fall into a different class of loans known as revolving credit. With a revolving credit account, the borrower typically has continuous access to funds as long as his or her account remains in good standing. Revolving credit card accounts are also eligible for credit limit increases on a regular basis. Interest rates are typically higher than for personal loans.
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Revolving credit works differently than a personal loan. Borrowers have access to a specific amount but do not receive that entire amount. Instead, the borrower can withdraw funds from the account at their discretion at any time up to the maximum limit. Borrowers only pay interest on the funds they use, so a borrower can have an interest-free account open if it is out of balance.
Credit cards can come in many varieties and offer a lot of convenience. The best credit cards may include 0% introductory interest periods, balance transfer availability, and rewards. At the other end of the spectrum, some may come with high annual percentage interest rates along with monthly or annual payments. Usually all credit cards can be used wherever electronic payments are accepted.
High-quality cards with reward points can be very beneficial for borrowers who use the benefits and pay off the balances each month. Rewards cards can offer cash back, points for discounted purchases, points for store brand purchases, and points for travel.
In general, credit cards can also be unsecured or secured. Unsecured cards offer credit without collateral. Secured cards are often an option for borrowers with low credit scores. With a secured card, the borrower is required to provide capital towards the card’s balance limit. Secured cards have different terms, so some may match the guaranteed balance, some may offer an increase after a set amount of time, and some may apply the guaranteed balance to the card as a payment after several months.
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In general, each type of credit card will have its own way of accruing interest, so it may be important to read the fine print. Unlike personal loans, where the monthly payment is usually the same throughout the repayment term, your credit card bill varies each month.
Some credit cards offer the borrower the benefit of a statement cycle grace period that allows freely borrowed funds. Other cards will charge daily interest, including the final interest fee at the end of the month. For cards with a grace period, borrowers may find they have about 30 days to buy something interest-free if the balance is paid off before interest starts accruing.
Overall, on the surface, credit card financing may seem like an easy option, but as with any loan, it’s important to do your due diligence. Credit cards can offer a great alternative to personal loans as they can be available at 0% interest and can offer some grace periods. Convenience points and rewards are also other advantages. However, like any credit loan, interest and fees can be a significant burden.
If you’ve found yourself stuck with an expensive card and are looking for something with a lower interest rate, there are several cards available right now that are great for anyone looking to transfer their balance.
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In general, loans and revolving credit cards make up a substantial majority of the total credit market. However, in addition to personal loans and standard credit cards, there may also be other credit products for consideration. Here are some examples:
Business loans and business credit cards can be an option for all types of businesses. Underwriting a business loan usually involves analyzing financial statements and projections. Business credit cards can be somewhat easier to obtain and offer the same benefits as personal revolving credit cards.
Payday loans are offered at extremely high interest rates. Borrowers use work payslips to get cash advances. Payday loans can be considered predatory loans because of their reputation for extremely high interest and fees.
In general, credit can be a risky business that requires due diligence on the part of the borrower. The nature of credit agreements can create an opportunity for predatory lending and loan fraud, so it is always important to understand the terms of the credit and make sure you are borrowing from a legally authorized organization to protect yourself financially.
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Not all credits are created equal. Personal loans and credit cards can be structured with a wide variety of arrangements and terms. Personal loans have relatively lower interest rates than credit cards but must be repaid over a specific period of time. Credit cards provide continuous access to funds, and you only pay interest on outstanding balances that are not paid on time.
Whether you choose one or both, your credit score is key to getting approved and favorable terms. When it comes to the first, a personal loan calculator can help you better understand how your credit score will affect your monthly payments.
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