With the current credit crunch, it’s no surprise that many people are turning to personal loans in order to get their hands on some extra cash. As the interest rates of these loans are often lower than those of credit cards, this can seem like a great solution – but how do they compare? This article will give you more insight into the differences and similarities between personal loans and credit cards, to aid you in your decision.
Understanding credit scores
Before you can really compare credit cards to personal loans, you should understand how your credit score affects the availability of these financial products. Your credit score is essentially a numerical representation of your trustworthiness when it comes to money, and lenders use this number in order to approve (or decline) credit card applications.
This number is created through data from your credit report. As you can imagine, the better your credit score is, the easier it will be to get personal loans and amazing credit cards such as the Moneysmart credit card.
What’s on your credit report?
Your credit report is a record of your financial history, including all credit agreements you have taken out. For each agreement, a creditor will take note of the following:
The date on which you first opened this account. The amount that you borrowed. Your repayment history (i.e., whether or not you repay the loan as agreed). Any related events (such as missed monthly repayments, defaults, etc.). The repayment status of the agreement. The current balance if any.
Credit card companies such as MoneySmart can get their hands on this data by pulling your credit report from one or more of the following credit reference agencies:
- Experian
- Equifax
- TransUnion
Creditors can view your credit report in order to determine whether or not you are likely to repay any new loans, which is why it’s so important for this data to be accurate. Unfortunately, many people have errors on their credit reports, which could be hurting their chances of being approved for loans both now and in the future.
Personal loans
In simple terms, a personal loan is an agreement whereby the individual borrows money from a lender, which they subsequently repay in full with interest. One important thing to keep in mind about personal loans is that, unlike credit cards, they don’t offer ongoing access to funds.
You can borrow a lump sum but you will have a defined amount of time to settle your loan while following scheduled payments. Such arrangements often come with better interest rates for borrowers that have a good or high credit score.
Personal loans are used for various reasons, including debt consolidation, home improvements, or wedding expenses. In most cases, however, these loans come in handy when you want to fill gaps in your receipt of income.
They are also available as either secured or unsecured loans. Secured personal loans are ones where the borrower offers collateral in exchange for lower interest rates and better terms. Should you default on your agreement by failing to make payments or missing a payment date, you could lose your assets.
An unsecured loan, on the other hand, is simply that – an agreement whereby no collateral is used for borrowing. Instead, lenders will run a credit check in order to determine whether or not you are likely to repay them in full and on time. As with secured personal loans, these arrangements can come with lower interest rates for those with a good credit history.
Credit cards
As the name suggests, a credit card is essentially a small plastic card that entitles you to borrow money from a lender, on the promise that you will repay this debt plus interest at a later date. You can typically earn loyalty points and spend these points on future purchases.
Credit cards like the Moneysmart credit card are the most common form of plastic money in most parts of the world and they are pretty useful when one wants to avoid carrying cash around. These cards are issued by banks or other financial institutions, who are basically lending you their own funds at an agreed interest rate (and with additional fees, too).
Such cards fall under a class of borrowing referred to as revolving credit. With this type of borrowing, you get a line of credit that you can use again and again up to a certain predetermined limit. You will have access to the funds as long as your account is in good standing.
Even though they have higher interest rates when compared to personal loans, credit cards also come with certain advantages over personal loans. These include easy access to funds, convenience when you need them most, and providing a line of credit for future purchases at higher interest rates than what is offered by banks.
Keep in mind that just like personal loans, credit cards can also come as either secured or unsecured.
Differences between personal loans and credit cards?
A personal loan is an agreement whereby you borrow a sum of money from a lender and repay it with interest over time. A credit card, on the other hand, is just that: plastic money that entitles you to borrow funds and repay them at a later date.
The main difference between these two types of borrowing is in how they are repaid – in full with interest for a personal loan, or with time while paying additional fees and interest for a credit card. It’s good to keep in mind that credit card payments vary every other month, whereas the repayments for personal loans remain the same over the entire repayment period.
