Is a Personal Loan or a Credit Card Better for You...

Comparing Personal Loans and Credit Cards

Walk into any bank and ask them for a personal loan, and they'll probably try to steer you towards a credit card instead. Personal loans and credit cards each have their own advantages and disadvantages, but the bank would probably make more money if you take their credit card (in other words, you may pay less to the bank if you get a personal loan).

If the bank says that they'd like to give you a credit card instead, and you want a personal loan, insist that you don't want a credit card, but that you want to have a loan that has a fixed repayment schedule (and that you prefer the added discipline and budgeting predictability that a personal loan requires).

Personal loans and credit cards are similar in that they are usually for small loan amounts ($500-$10,000), they are usually unsecured (you don't have to put up collateral), and they both carry higher interest rates (from 10 to 20 percent).

Credit Cards

The main advantage to a credit card is that you can be approved for a specified credit limit, but that you only borrow what you need, and you make payments only on what you borrowed. In other words, you could get a credit card with a $5,000 credit limit. If you charge $500 on your card, you only make payments on the $500, while leaving the rest of the credit card limit available to you if you need it in the future.

The drawbacks to a credit card are that you can make minimum payments, and not really have a set plan for when your credit card is "completely" paid off. People easily fall into the trap of using the convenience of credit offered from their card, and then make small minimum payments... over an extremely long period of time. The credit card has more freedom of choices, but it's this apparent way of having unstructured credit and payments that can get people in debt that's over their heads. This problem has become so common, that recently certain rules were enacted that actually raised the minimum payment required so that people wouldn't be making small minimum credit card payments with the prospect of paying off their card in 10 or 20 years.

Personal Loans

Personal loans are a good choice for people that may be facing a crisis and need money very quickly. Sometimes getting money from family, friends or savings is not a readily available option. In this situation, a personal loan can be less costly in interest charges compared to pulling out a credit card cash advance. Personal loans also offered a structured repayment schedule, so the person knows to budget an exact amount of money at the same date of the month, each month until the loan is paid off (which is also completely known in advance).

The main disadvantage to a personal loan, is that as soon as you take the loan out, the interest rate clock starts ticking on the full amount of the loan. If you get a personal loan for $5,000, then as soon as your loan is taken out, you start making payments on the $5,000 loan.

Again, depending on your needs, you can determine if you'd rather get a credit card or a personal loan.

Personal Loans for those with a Poor Credit History

For those with credit problems, they may find it difficult to get a personal loan at competitive interest rates. The obvious part of that statement is that if someone has credit problems, it may indicate the inability to repay a loan and maybe fair consideration should be given in regards that a personal loan might be best avoided. However, one may find that by restructuring their debts this way, it may offer some breathing room and a way to make repayments on a new loan.

There are some finance agencies that are ready to offer personal loans, even for those with less than a perfect credit history. Many times, these loans offer market leading rates, and come from reputable lenders. A little research can uncover a broad range of loan programs available for individuals with some credit problems, especially if you only need $1,000 or less money. For personal loans above $1000 and up to $10,000, it is worth you time to make your credit appear as good as possible as some finance companies will take a look at your credit history, especially in the area of repayment for unsecured loans.

If you belong to a credit union, try applying for a loan there first. They are usually willing to look at individual member's situations, their interest rates are usually lower, and they are more forgiving if you run into a problem during the course of repaying your loan.

The next place to check in your quest for a personal loan would be your local bank, preferably a bank that you have a history with. If you have a good account history with the bank, you'll have a better chance to be approved (of course, that's if you bank offers personal loans, as some have decided to only do credit cards).

Find a way to work closely with your banker or credit union representative, and if they say that they need more reassurance of getting the loan repaid, you can offer either collateral or a co-signer to "sweeten" the deal. While this gives you more leverage to getting the loan, you risk the chance of either losing the collateral, or losing the relationship with your co-signer, if you default on the loan.

If a bank or credit union is out of the question, the next place to check would be a local finance company. Keep in mind that these places usually charge a much higher interest rate than either a bank or credit union, their loan amounts may a little less, and they are not as forgiving if you are late on repayment.

Something you need to be aware of in your quest for a loan is not to apply for several loans at the same time. Doing this could make you look desperate and lower your chances for getting approved for any loan. Afterall, what lender would want to grant a loan to a person that has applied all over town (or that has been turned down by all the other lenders in town).

In conclusion, the best thing to remember is to get all the information that you can, speak with the loan officers about what type of applicant they look for, and then only apply to the lender that offers a good chance for you getting your loan.

If you need a personal loan, but have credit problems,
click here for information on how to get a personal loan