When you’re thinking of applying for credit, two things will likely pop into your head, credit cards and personal loans. While both of these things can be helpful when we need some extra cash, they’re wildly different beasts with different purposes.
What is a Personal Loan?
Personal loans allow you to pay for large purchases over time. They’re typically installment loans, meaning you’re given a lump sum to pay back with interest. They can come in many forms, but the most common is secured and unsecured. MaxLend offers both types of loans.
Secure loans require you to use collateral to mitigate risk to the lender. They’re typically easier to get and boast a low-interest rate. If your loan is attached to something that a lender can repossess, it is considered a secure loan. Unsecure loans come with more risk for the lender because they lack connection to anything tangible. They have higher interest rates and are harder to get, but they’re also more versatile. MaxLend reviews can give you an idea of what others are saying about the personal loan process.
What is a Credit Card?
A credit card is a type of revolving credit account. It involves a cycle of purchasing and payment in which every time you pay off a purchase, those funds become available again. Credit card companies set a borrowing limit. Your credit limit is the max amount you can spend before needing to make a payment.
Credit cards also charge interest. You’re given an interest rate and a credit limit. Each purchase accrues interest if not paid off by the end of the month. Changes in balance and interest charges can mean fluctuations in monthly payments.
How are personal loans and credit cards similar?
Both loans and credit cards give you access to money you wouldn’t have otherwise. They both charge interest on the funds you borrow, and you pay them monthly. They require an application process to determine your creditworthiness based on your credit score and report and your debt to income ratio. The better your credit, the more options the lender will provide, including lower interest rates.
How are personal loans and credit cards different?
Loans and credit cards are different types of credit. One is installments, and the other is revolving. Loans are a set amount of money that will not change based on payments. When you get simple fast loans to make large purchases, the amount is finite. You will never get to use that money for anything other than the original purchase.
Credit cards are more like bank accounts. The money is there when you need it, and when you put more in, you can purchase something else. It also differs in that the less you spend, the less you pay, and vice versa. There is no set amount you’ll spend or pay.
When Should You Get a Personal Loan?
A loan is ideal if you are:
- Consolidating debt
- Making a large purchase
- Funding a home remodel
- Covering unusual expenses (ex. medical bills, car repair)
When Should You Get a Credit Card?
A credit card is ideal if you are:
- Making a small purchase
- Covering small, unusual expenses (ex. new shoes)
- Creating an emergency fund
- Able to pay off the balance in full each month
There are many reasons you could need credit. Knowing the difference between credit types can save you time, money, and stress.