Credit cards are a convenient, simple and fast way to borrow money. But they’re also a very costly one, often with double-digit interest rates and punishing consequences to your credit score.
Many times, a personal loan beats a credit card. Here are five:
1. You Want to Save Thousands of Dollars
If you have credit card debt, it’s highly likely that you are paying double-digit interest. In fact, if national statistics are any guide, your card is closer to 15% APR.
Personal loans, on the other hand, have much better rates, as low as 5.99% APR. That can make a huge difference in how much total interest you pay. Let’s crunch some numbers to see exactly why a loan wins out:
Let’s say you choose a five-year term on the $10,000 personal loan. Your monthly payment will be $193 and you will end up paying a total of $1,597 in interest over the entire five years.
Now, let’s assume you summoned superhuman willpower and paid off your credit card debt in five years. At 15% APR, you would need to pay $237 per month. And your total interest? A whopping $4,274. That makes a personal loan a clear winner.
2. You Want to Be Debt-Free
Let’s face it: you’ll probably never pay off that credit card debt. And it’s not your fault. Credit card debt is tough to pay off because there is no clear payoff date. So you just keep paying and paying… and paying, without ever feeling you’re making a dent in your debt.
Personal loans are entirely different. You choose your payoff date, usually anywhere from one to five years away. You also know exactly what your monthly payment will be each and every month – it doesn’t change like credit card minimum payments do. That’s why personal loans give you a clear and achievable path to being totally debt-free. We know it difficult, but just imagine what that might feel like.
3. You Want Less Stress
Life is complicated enough without having two or more credit card payment dates each month. It can make you feel like a circus juggler. Especially when the minimum payments can change.
But with a personal loan, you have the peace of mind of knowing that your one monthly payment will not change for the life of your loan. It allows you to budget – and relax. Set up automatic payments and your life becomes even simpler. And simpler equals less stress.
4. You Want to Improve Your Credit Score
Yes, they’re both a form of debt, but credit card balances and personal loan balances are seen differently by credit rating agencies.
Credit cards are known as “revolving credit” accounts and they have a potentially huge negative impact on your credit score. For instance, many credit score models penalize you for using more than 30% of the available credit on credit cards. This is why many financial experts refer to credit card debt as “bad debt” and suggest paying them off – or at least down – the first chance you can.
By contrast, personal loans are known as “installment debt.” In this scenario, you are approved for an amount, have a clear payoff date, consistent monthly payments, and most likely a lower, more manageable interest rate. Can you see why credit rating agencies aren’t as worried about this type of debt? Obviously, there are many factors used to determine your personal credit score, but a personal loan might be a way to get rid of that “bad debt.”
You should get a handle on the various credit factors and make it a habit to monitor your credit to find potential savings and work towards improving score. My LendingTree provides a smart and free way to get your credit report - updated monthly and analyzed for savings.
5. You Need More Money
If you need to make a major purchase, but you don’t have the cash, and your credit limits won’t allow you to pay with a credit card, a personal loan could be the answer.
While credit cards commonly have limits of $5,000 or $10,000, personal loans of $1,000 to $35,000 are available – likely at much better rates than your credit card. And, many times, a personal loan can fund in less than two days.
How to Shop for a Personal Loan
Fortunately, in the age of the Internet, shopping for a personal loan is every bit as convenient as using your credit card. Sites like LendingTree, one of the nation’s most respected loan comparison websites, let you shop personal loan rates for free. You get the best rate and terms because lenders compete to win your business.
It’s the hassle-free way to get rid of your credit card debt, lower your monthly payment, and get on track for becoming debt-free.