How To Get By In An Emergency: Personal Loan Or Credit Card?

Life and Money

Picture of woman sitting (not showing face) and putting money in a glass jar that contains other bills and change

As a credit union member, you have borrowing options. Two popular choices for emergency funding are personal loans and credit cards.

Here are several pros and cons to each.

1.) Limits.

Credit cards have credit limits in the thousands, enough to cover a small emergency. The value of credit cards is their convenience; there’s no need for a new loan each time you incur an expense.

Your personal-loan approval amount depends on several factors: income, credit score and other assets. For borrowers with good credit history and a strong ability to repay, these loans could be $50,000, enough for serious unexpected expenses.

2.) Repayment options.

Credit card repayment is handled monthly. There’s a minimum payment and no fixed term to repayment.  If you continue charging and only pay the minimum, paying off your loan can take forever.

In contrast, a personal loan, includes a fixed monthly fee. This lets you repay the loan in a set amount of time. It’s amortized so you’re making equal payments of both interest and principal over the loan’s life. There’s also no penalty for early repayment.

3.) Usability

Credit cards only work at a merchant terminal; they’re difficult to use for paying back friends.

A personal loan is deposited directly into your draft account. You can withdraw it as cash, write checks or use auto draft features.

If you’re negotiating a reduced price for a major expense, many businesses offer a cash discount – they pay for processing fees and prefer cash. If you’re paying a hospital, they may also accept a lower fee if you pay cash.

4.) Interest rates

Credit card interest rates can be high; the global average is 15%. Some credit cards fluctuate their interest rates based on the prime interest rate, and they can alter your rate if your credit score changes dramatically, making it difficult to plan your financial future.

A personal loan has a fixed interest rate that never increases if you don’t miss a payment. You can make a future budget that involves paying a fixed amount over approximately five years.

Interest rates on personal loans are usually lower than on credit cards. For people with average credit, interest rates can be 5% lower; for those with better credit, it can be even lower.

 

SOURCES:

https://www.nerdwallet.com/blog/loans/cheap-personal-loans/

http://www.valuepenguin.com/average-credit-card-interest-rates

https://www.nerdwallet.com/blog/credit-cards/credit-card-issuer-raising-interest-rate-5-times/

http://www.theatlantic.com/magazine/archive/2016/05/my-secret-shame/476415/

7 Comments on “How To Get By In An Emergency: Personal Loan Or Credit Card?”

  1. That’s interesting that personal loans have higher limits than a credit card. That could really help out in aa expensive emergency (like something that deals with a house). You’ll want good credit to get a good rate on any type of borrowing, though. Good credit is at least 700.

    1. Hi Juan, visit us at your local Directions Credit Union branch to discuss your options with one of our Member Service Representatives.

  2. Hello, Im trying to get a personal loan for $1,800. How would i go about in trying to apply for one? My credit isn’t very good, but i do have a full time job, and looking for pay off the loan off in 4 months.

    1. Hi Andrea, we would suggest reaching out to our Member Service team by calling 1-888-508-2228. They can answer all your questions and would be happy to assist you.

Leave a Reply

Your email address will not be published. Required fields are marked *