How Do Personal Loans Work
A personal loan is an unsecured loan that you can use for just about any purpose: Debt consolidation, a vacation, a vehicle purchase, or a home improvement project.
A personal loan works more like an auto loan than a credit card.
- When you take out the loan you receive the loan amount in a lump sum.
- You make fixed monthly payments for the agreed-upon term .
- Personal loans usually have terms between two and five years.
- Personal loans usually have a fixed interest rate.
- There is no penalty for paying off the loan early.
Typically, you can apply for a personal loan entirely online. To apply, youll need to provide your personal and employment information on an online credit application. The bank may ask to see proof of your income, such as a pay stub or W-2 form. Generally, the bank will let you know if youre approved within one or two business days.
At this point, youre under no obligation to take the loan you usually have a week or so to decide. You can review the interest rate and terms of the loan and decide whether it fits your needs. If you accept the loan, youll sign a promissory note and the money will be transferred into your checking account. Youll then receive billing statements and must make equal payments each month on the due date.
Is It A Good Idea To Pay Off Credit Card Debt With A Personal Loan
If you’re struggling to afford credit card payments, taking out a personal loan with a lower interest rate and using it to pay off the credit card balance in full may be a good option.
A debt consolidation loan with a low interest rate could mean owing less per month, which can help you make loan payments on time. A lower interest rate may also leave you with more money to put toward the loan balance, allowing you to pay it off earlier.
But before you use a personal loan to pay off credit card debt, consider not only the interest rate you receive, but also the repayment term lenders offer. Choosing a longer repayment term than you would have needed to pay off the original credit card debt could cost you more in interest. If a longer repayment term helps you afford to repay the debt, though, it could protect your credit from the effect of missed payments, making the choice worthwhile.
When Is A Credit Card Better Than A Personal Loan
If youre making a purchase of between a few hundred and a couple of thousand dollars that you can repay in a year or so, the cheapest way to do it may be to apply for a credit card that offers a 0% intro APR on purchases. If you have good credit, a 0% credit card gives you an interest-free loan as long as you repay the debt in full before the introductory period expires.
The same is true if you want to consolidate debt with a credit card balance transfer. If the debt is less than a few thousand dollars and you can pay it off in 18 months or less, a 0% balance transfer credit card will be your best bet.
Plus, a revolving debt like credit card debt tends to carry more weight in your credit score than installment loans. With that, responsible credit card management could lead to an increase in your credit score quickly.
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It Might Be Difficult To Avoid Using Your Credit Cards
If you are in the habit of using your credit cards to cover expenses that you cant pay off in full every month, it might be difficult to learn how to spend within your means. When you use a personal loan to pay off credit card debt, its important to avoid racking up new credit card balances as you pay off your personal loan. Otherwise, you could end up worse off than you started.
If you can handle making small purchases on your credit cards and paying them off in full every month, you might be able to continue using your credit cards after youve paid them off with your personal loan. If not, it might be a good idea to avoid using your credit cards altogether. Once your personal loan is paid off, you can start using credit cards againbut only for purchases you can pay off in full at the end of each billing cycle.
Personal Loans Vs Credit Cards: Whats The Difference
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The basic difference between personal loans and credit cards is that personal loans provide a lump sum of money that you pay back each month until your balance reaches zero, while credit cards give you a line of credit and a revolving balance based on your spending.
Think of a personal loan as a good option if youre getting a large, significant purchase, says Dan Herron, a certified financial planner based in San Luis Obispo, California.
I look at credit card spending as Im buying five lattes at Starbucks versus going to buy a car or boat or something thats a little larger in scale, he says.
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Can I Afford The Monthly Repayments
Theres another side to the coin: while its good to pay off debt as quickly as possible, you need to be realistic. If youre overly ambitious when applying, and end up missing repayments, your credit score will be very badly affected, so its crucial that you only borrow what you can afford to repay.
For more information on this topic, take a look at our guide to when debt consolidation is a good idea.
Should I Consolidate Credit Card Debt With A Personal Loan Or Credit Card
You can use a personal loan or credit card to consolidate credit card debt. However, they take two different approaches.If you think you will pay off your credit debt within 12-24 months, you could get a 0% APR credit card and transfer your balance to this credit card. So long as your repay your balance in full before the end of the introductory period, you will not owe any interest. Therefore, a 0 APR card is a smart way to save money and defer on interest. If you think you will need more time to pay off credit card debt, you are better off getting a personal loan to consolidate credit card debt. This credit card consolidation calculator shows you how much money you can save through with a personal loan. When you consolidate credit card debt, make sure that the interest rate on your personal loan or credit card consolidation loan is lower than the interest rate on your credit card.
You can also have both a personal loan and a credit card. You dont have to choose between a credit card vs personal loan. Just remember that personal loans and credit cards are used for different purposes. You can take control of your financial life and save money when you use a credit card vs personal loan wisely.
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Difference Between Personal Loans And Credit Card Loans
Personal loans are unsecured loans taken to meet various personal needs, ranging from debt consolidation to home renovation projects, and provided as a lump sum amount. In contrast, credit cards are classified as revolving credit, which allow you to borrow money up to a prespecified limit and pay it back monthly.
Both the financial products are deliberately designed to serve a gamut of personal needs the customer may have. Having said that, its also equally important to highlight how the two differ.
When you take a personal loan, youre obliged to repay the borrowed sum over a predefined tenure, so you have a clear overview of your debt. Credit cards, in contrast, have a monthly billing cycle, where all your monthly transactions are added to your credit card bill, including other charges. As a result, your debt varies from month to month.
Should You Get A Personal Loan A Balance Transfer Credit Card Or Both
Making a balance transfer or applying for a personal loan can be helpful when you need to pay off existing credit card debt. However, determining which of the two might work better requires paying attention to factors such as the amount you owe, the interest you might need to pay, your creditworthiness and your ability to make repayments.
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A Late Payment On Your Personal Loan Wont Trigger A Rate Re
A late credit card payment will likely cost you $25- $35 and a 23-30% penalty APR. Studies have shown that credit card companies collect more than $20 billion in penalty fees each year.
A late payment on a personal loan will typically cost you a $15 late fee, but your interest rate will remain the same. Additionally, online lenders tend to be smaller companies who are going to be more willing to work with you. Upstart personal loans enable you to set up automatic payments and sends friendly reminders beforehand, so you can avoid this whole mess in the first place.
You Want A Lower Interest Rate
Personal loans are specifically designed for paying over the long term, so their interest rates are tailored to be fair and conducive to paying off a debt. Though the APR on your personal loan depends heavily on your credit score but can easily be under 10%, whereas the average credit card APR is 17.72%. Credit cards makes very little sense as a long-term revolving debt, unless you have a 0% intro APR offer.
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Bankruptcy Attorney In Chattanooga Tn
Falling into personal loan or credit card debt can be hard to escape, depending on how deep you are. Try calling us at Tom Bible Law today at 424-3116 and we can explore your bankruptcy options. Our team of Tennessee bankruptcy attorneys might be able to help you overcome your debt. We can be found in your local Tennessee cities of Chattanooga, Kingsport, and Tullahoma.
Fixed Term Personal Loans Make It Easier To Stick To A Budget
The unexpected expense is budget kryptonite. It is much harder to stick to your savings goals when your monthly bills are inconsistent. A personal loan takes the guess work out of the equationthe amount borrowed, payments, and timeline for repaying are all known quantities. Your debt is steadily flowing in one direction.
With everything is in flux, making it difficult to know what your monthly bill will actually be. The psychology of credit cards makes it easy to overspend and get stuck in the minimum payment trap, prolonging your repayment schedule and wasting money on interest payments.
When you pay for an item with a credit card its easier to spend more money. McDonalds found that the average transaction rose from $4.50 to $7.00 when customers used plastic instead of cash. Those little extra expenses add up and siphon funds that could be earning interest out of your savings.
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When The Interest Rate Is Lower
The average interest rate on credit cards hovers around 14.5%, according to the Federal Reserve, with many carrying an even steeper rate. If you have a good credit score and need to make a large purchase that can be paid off over time, you’re almost always money ahead with a personal loan.
Let’s say your mother-in-law is moving in, and you want to create a comfortable space for her in your walk-out basement. You’re doing much of the work yourself and expect the project to cost $20,000. Here’s how taking out a personal loan to pay for the remodeling project compares to paying for the project using credit cards.
- You take out a personal loan with an APR of 6%. Your monthly payment for four years is $468, and you pay a total of $2,476 in interest.
- You use a credit card with an interest rate of 14.5% and make equal monthly payments of $391. It takes six years and nine months to pay the credit card off, and you pay a total of $11,334 in interest.
In nearly every situation, a loan from the best personal loan lenders will save you money. In this case, it would save $8,858 in extra interest payments.
When You Want To Consolidate High
There’s nothing like a personal loan to help you consolidate high-interest debt. Let’s say you have three credit cards, with interest rates ranging from 14% to 22%. You may also have a high-interest loan on appliances or a recreational vehicle. There are at least three benefits to consolidating those debts into a personal loan with a lower interest rate.
Note: If you must lower your monthly payment to make ends meet, choosing a longer term makes sense. However, the longer the term, the more you’ll end up repaying in total interest. Always choose a loan with the shortest repayment term you can afford.
There’s a time and place for most financial products . Before you decide how to pay for something, sit down and do the math. Decide for yourself which payment method allows you to pay the debt off fastest and with the least amount of interest.
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Is 0% Interest Really 0%
On paper, yes, but in reality, it is very unlikely. Balance transfer plans will offer a 0 per cent interest for a specific period of time. However, this does not mean that there are no fees involved. While the bank may not charge interest for the duration of your loan , you will have to pay for a processing fee on the approved transfer amount.
For personal loans, some lenders may offer a 0% interest loan, but with a higher processing fee. Be sure to check with the service providers on any fees that you are paying for. They may not be stated as âinterest ratesâ but could be categorized under administrative or processing fees. So your best bet would be to reference the advertised EIR before selecting a loan.
Could A Balance Transfer Option Serve Your Needs
Debt consolidation loans are a form of debt refinancing that combines multiple balances from high-interest credit cards or other high-interest loans into a single loan with a fixed rate and fixed term. It can help you save money by reducing your interest rate, lowering your monthly payment, or making it easier to pay off your debt faster.
Balance transfer credit cards may feature an introductory zero percent rate, typically between 12 to 18 months. If youre sure you can repay what you owe before the promotional period ends, you could save money on interest costs. However, many balance transfer credit cards charge a balance transfer feeusually 3% to 5% of the amount you transferso make sure you consider that added cost in your comparison.
If you know youll need a few years before paying down your debt, a balance transfer personal loan could be a better option. This is a type of personal loan that allows you to consolidate multiple debts, often at a lower interest rate when compared to credit cards. In addition to the savings and convenience of one single, easy-to-manage payment, choosing a balance transfer loan can help increase your credit score over time. Many LendingClub members who choose balance transfer loans see an increase in their credit score while saving money with a lower APR.1
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Why Is Personal Loan Better Than Credit Card Loan To Finance A Purchase Or Project
Its the sales season, all the cards are aligned in your favour, and your Mercury is finally out of retrograde because the Smith machine you had been waiting to add to your home gym is launching last. Now, instead of exhausting your savings, you decide its better to go take a personal loan to finance your big-ticket purchase. This leaves you puzzled over the two options: using your credit card or availing personal loans.
Well, no matter what your big-ticket expense is, a personal loan will almost always fare better between the two. Lets explore why.
Youre Making A Small Purchase
If you have a small purchase or can afford to pay the balance off, a credit card can be a better idea.
But you want to make sure you can afford to pay off your credit cards at the end of each pay period. If not, and you carry a balance over to the next month, you could face high interest charges and fees.
Learn More: How to Pay Off Credit Card Debt Fast
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Should I Use Credit Cards Or A Personal Loan To Consolidate Debt
Personal loans and balance transfer credit cards are two of the most popular ways people consolidate debt. Deciding which one will help you reach your goals faster can be hard to figure out at first. Below are some of the key differences of using a personal loan versus a credit card to consolidate debt, to help you make the best decision.
Alternatives To Using A Personal Loan To Pay Off Credit Card Debt
Using a personal loan may not be the only way to pay off credit card debt, so you should also consider alternatives. For example:
- If you can qualify for a 0% balance transfer credit card, you may be better off doing so. You may be able to transfer the existing balances of your credit cards to a new balance transfer card that charges 0 percent interest for a set amount of time. Just make sure you can pay off the balance before the 0 percent promotional rate expires. Also, make sure you understand the differences between personal loans and credit cards.
- You may want to use a home equity loan or home equity line of credit if you have a lot of equity in your home. A home equity loan or line of credit likely will have a lower interest rate than a personal loan. But, be aware youre putting your house at risk, so dont do this unless you can definitely pay back what you owe. Its also worth pointing out that interest on a home equity loan or line of credit is not deductible.
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