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Personal Credit Cards are different from. Credit Cards
Understanding the Credit Scores
Personal Loans
Line of Credit vs. Loan
Credit Cards
Other types of credit lending
Special Considerations
The Bottom Line
Personal Loans, Credit
Personal loans vs. Credit Cards What’s the difference?
Which ones are better than the other and what are the pros and pros and
By Greg McFarlane
Updated June 26, 2021
Review by Thomas Brock
Personal Credit vs. Loans. Credit Card: An Overview
Personal loans and credit cards both allow you to obtain funds, and come with numerous of the same credit clauses. Both loan or credit card contracts you will typically find funds provided by a lender at a specified interest rate, monthly installments that include principal and interest and late fees, as well as underwriting requirements, amount limits, and other. Incorrectly handling either credit could damage your credit rating, which can cause issues with loans, access to good housing, finding jobs
Beyond the similarities in features personal loans and credit cards share they also have some significant differences, such as the repayment terms. Let’s examine the definitions and distinctions between them, along with some pros and cons for each.
Key Takeaways
Personal loans offer money borrowed in one lump sum that has lower interest rates; they must be repaid in a limited amount of time.
They are form of revolving credit that give the borrower access to money as long as the account is active and in good condition.
Credit score is a major element in determining the approval and terms for both personal loans as well as credit cards.
Personal loan and credit card agreements are constructed with a range of clauses and terms.
Personal Loans vs. Credit Cards
Investopedia / Lara Antal
Understanding Credit Scores
Before you begin comparing the different features of individual loans or credit cards, it’s essential to be aware of one of the main similarities. It is the case that U.S. and most countries have implemented a credit scoring system that is the foundation for credit approvals. The three main U.S. credit bureaus—Equifax, Transunion and Experian — are the pioneers in the development of credit scoring standards and partnering with lending institutions to allow credit approvals.1
Credit scores are determined by a person’s past credit history that includes credit defaults, inquiries, accounts, and outstanding balances. Every individual gets an individual credit score, from this past history, which greatly affects their odds of credit approval. All of the factors considered by a lender will affect the interest rate a borrower pays as well as how much principal for which they are approved.1
Both personal loans and credit cards can be secured or secured but they are not secured as well, which has an impact on credit terms.
Paying the balance on your credit card and repaying personal loans promptly can help build the credit rating.
Personal Loans
The lenders offer a range of options within personal loan category that could affect the credit terms. In general, the primary difference between a private loan and a credit card is the longer-term balance. Personal loans do not offer ongoing access to funds like a credit card does. A borrower is offered an initial lump sum and is given a time period to repay it in full, using scheduled payments, and take over the loan. The arrangement typically has lower interest rates for borrowers with a good to high credit score.2
A personal loan can be utilized for many reasons. Unsecured loan can be used to finance large purchases, to consolidate debt from credit cards, fix or renovate a home or even to cover gaps in income. Unsecured loans do not have the backing of collateral pledged by the borrower.
Home loans and auto loans, and other types of secured loans can also be considered a personal loan. These loans will be subject to standard procedures to be approved for credit, however they may be easier to obtain since they are secured by the security of a lien on assets.
For a home loan or an auto loan such as an auto loan, the lender has the right to acquire your vehicle or your home following a set amount of delinquencies. Secured loans typically have slightly more favorable terms due to the fact that the lender has ownership rights involved which reduces the risk of default. Here are some pros and cons of a personal loan.
Pros
Most often, it is best to use this method for larger purchases such as homes or vehicles
Typically, they offer a lower rate of rate of interest than a credit card
Provides funds in one lump sum
Cons
Typically, the service fee is included and may have other fees which add up
Property used as collateral, such as a car or house, could be confiscated if you fail to pay back in a timely fashion (secured loans)
Be aware that interest isn’t the only cost to be considered when evaluating the process of obtaining a loan. The lender may also charge fees, which can add to a loan’s total costs. Personal loans typically include an origination fee and may be subject to additional fees.
Line of Credit vs. Loan
A distinction worth pointing out is the distinction between a line of credit (LOC) and an loan. In contrast to an loan one can say that a line of credit comes with built-in flexibility, which is its main benefit. A disadvantage is that it is typically paired with higher interest rates.
An LOC is a predetermined loan amount, however, borrowers don’t have to use it all. A borrower has the ability to draw funds from the line of credit at any time as long as they do not overspend the limit of credit and other requirements including making timely minimum payments.
The LOC may be secured, or unsecured (most are the latter) and is usually offered by banks. One exception is a home equity line credit (HELOC) that can be secured with the home equity of the borrower’s home.3
Credit Cards
Credit cards are a different class of borrowing referred to as Revolving credit. With a revolving credit account the borrower generally is able to access the funds for as long as the account remains in good standing. Credit card accounts that are revolving can also be eligible for credit limit increments regularly. Interest rates are typically higher than personal loans.
Revolving credit operates differently from a personal loan. Borrowers have access to a specified amount, but do not receive that amount in full. Rather, the borrower can take funds from the account at their discretion anytime up to the maximum amount. The borrower pays interest only on the funds they use thus a borrower can hold an account that is open but pay zero interest if there is no balance.
Credit cards can come in a variety of varieties and provide plenty of convenience.4 The best credit cards can include 0 percent introductory interest as well as balance transfer access and rewards. On the other end of the spectrum, some are able to offer high annual percentage interest rates and annual or monthly fees. All credit cards can usually be used anywhere electronic payment systems are accepted.
High-quality cards that offer rewards points are beneficial for a borrower who takes advantage of the benefits and pays balances down each month. Rewards cards provide money back or points towards reductions on shopping, rewards for brand name purchases at the store as well as points towards travel.
In general, credit cards can also be secured or unsecured. Secured cards provide credit without collateral. Secured cards are often an option for borrowers with poor credit scores. With a secured card, the borrower has to provide capital towards the card’s limit on balance. Secured cards come with different conditions. Some may be able to be able to match the balance of the secured account, some may offer an increase upon a certain amount of time, while certain cards may transfer the secured balance to the card to make a payment after several months.
In the end, every type of credit card will have different ways of accruing the interest rate, therefore it’s crucial to be aware of the fine print. Contrary to personal loans which are a monthly payments are usually identical throughout the entire term of repayment the amount due on a credit card is different every month.
Some credit cards offer borrowers the advantage of a grace period that allows the borrowing of funds without restriction. Other cards will charge daily interest, including the final interest rate at the close in the calendar month. For cards that have grace period, cardholders may find they have around 30 days to buy an item interest free in the event that the balance is settled before interest starts to accumulate.5
Pros
Revolving credit balance on a continuous basis that does not charge interest until funds are utilized
For those with good credit, cards with zero interest rates for introductory periods, grace periods, and rewards
Accounts that are in good standing are generally can be eligible for credit limit increases regularly
For those with less than bad credit, the ability to build up to better credit terms in the future
Cons
The interest rate is typically higher than personal loans
The cost of interest and other fees can be a significant amount.
In the beginning the idea of financing using a credit card may seem as a straightforward option however, like all borrowing, you need to be cautious. Credit cards can offer a viable alternative to personal loans since they can be offered at 0% interest rates and could also offer grace time. The convenience and the rewards points are additional benefits. But like for any loan, interest and fees can be a considerable burden.
If you’re trapped with a high-cost card and want to find a card with a lower interest rate There are many options available, which are ideal for anyone looking at transferring their existing balance.
Other types of credit lending
In general, loans or revolving credit cards constitute a large majority of the total credit market. But, in addition to typical individual loans as well as credit cards there can also be other credit products to consider. Here are a few examples of:
Business Loans and Credit Cards
Business loans and credit cards for business are an options for all kinds of businesses. Business loan underwriting usually involves review of financial statements as well as projections. Business credit cards can be slightly easier to get and provide the same benefits as personal revolving credit cards.
Payday loans
Payday loans are available with very high interest rates. People who borrow money use their pay stubs to obtain advances in cash. Payday loans can be considered precarious loans due to their reputation for extremely high interest and fees.6
Special Considerations
The general rule is that credit is an unwise business and requires diligence from the person who is borrowing. A credit agreement’s nature may create an opportunity for predatory lending and lending fraud, so it is crucial to be aware of the terms used in credit agreements and ensure that you are borrowing from a legitimately authorized company to safeguard yourself financially.7
The Bottom Line
There are many different types of credit that are not the same. Credit cards and personal loans and credit cards are able to be structured using a range of provisions and terms. Personal loans have relatively lower rates of interest than credit cards but must be paid back over a specific amount of time. Credit cards provide ongoing access to funds and only charge interest on balances due that aren’t paid off in a timely fashion.
No matter if you decide to choose one or both the credit score is key in securing approval and favorable conditions. When it comes to the former one, a personal loan calculator will help you get a better understanding of how your credit score can influence your monthly payments.
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