When Should I Choose a Loan Instead of Credit?money4u
You don’t like getting into debt, but sometimes you don’t have a choice. Perhaps you have medical bills you need to pay, or maybe you need funds to pay your school tuition or start a business.
When you must borrow money, your first instinct is probably to charge your credit card. But there are several reasons why you should take out a loan instead.
Lets You Borrow More Money
If you need a large sum of money right away, you might not be able to obtain it with a credit card. Most credit cards have a credit limit of less than $5,000. If you don’t yet have an established credit history, your credit limit is even lower.
In this case, you may still qualify to borrow a large sum with a loan.
Provides Fixed Interest Rates
Loans have interest rates, but those rates are often lower than credit card interest rates. And while credit card interest rates can fluctuate, loan interest rates are fixed. That way, you know exactly how much you can expect to pay each month. You won’t suddenly get uprooted by an unexpectedly high interest rate.
Gives You More Time to Pay
If you charge a credit card, ideally you’ll pay the balance by the end of the month. You can carry over part of the balance to the next month, but you’ll then need to pay more interest. As you carry over the balance, your credit score will decrease as well.
You can find loans that offer a longer period of time to pay what you borrowed-without additional interest. Some loans give you up to five years to pay back your loan without extra interest charges.
Does Not Impact Credit Utilization
To keep the best credit score, you should use ten percent or less of your credit line. If you suddenly use more of your card’s credit line, you raise what’s known as credit utilization and thereby lower your credit score.
Fortunately, most loans are different. In most cases, taking out a loan will not hurt your credit utilization. But keep in mind that applying for a loan can hurt your credit score. Thus, don’t apply for more than one loan at the same time.
Provides an End Date to Your Debt
With credit cards, you can continue to borrow money and stay perpetually in debt. With a loan, though, you know exactly how much you’re borrowing and when you need to pay it off. After you pay the loan, you’re no longer in debt.
When Should You Use a Credit Card?
There are some instances where you should stick to the plastic. If the amount you need is small, and you’ll be able to pay it off quickly, use a lowinterest (preferably 0% interest) credit card. If you pay the debt in time, you may pay less than you would on a loan.
But, if you need a larger loan and a longer time period to pay it off, a loan is your best bet.
How a Loan Works
To take out a loan, first talk to a lender. The amount you can borrow depends on several factors, including your income and your credit score. In exchange for giving you the money you need right away, your lender will charge an APR (annual percentage rate) based on the amount you borrow. However, some lenders offer your first loan free.
When you take out the loan, your lender gives you a check of the amount you need, which you can use right away. Each month, you pay your lender back a portion of the loan. Make sure to talk to your provider about the best way to make payments. For example, some providers will help you set up an online account so you can make payments more conveniently.
If you find yourself in a tough financial situation, talk to a lender about taking out a loan. Make sure you ask them about their APR and whether they charge any other fees. Some lenders charge what’s known as an origination fee; it’s usually between one and five percent of the loan amount.
Paying off more of your loan early might save you on interest costs. But if you want to pay off a big chunk of your loan early, make sure you check with your lender first. Some lenders charge a fee for early repayment.
Remember, a lender looks into your credit before they approve you for a loan, and these reviews can hurt your credit score. To avoid applying for multiple loans-and thus lowering your credit score-ask your lender what credit score they require. Only apply for a loan from them if you have confidence your score is good enough to meet their requirements.
Once you’ve found the right lender, you and your lender will agree on a repayment plan. Make sure you can meet the requirements before you agree on the loan.
Don’t worry if you need a sum of money right away. Turn to a reliable lender for a loan that meets your financial obligations.