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When you come up short on cash, you have two options to fill the gap: credit cards and personal loans. The best choice depends on a few factors, including how much money you need and how quickly you’re likely to pay it back. Understanding the difference between the two and asking yourself a couple of questions can help you make the right decision.

What are the differences between credit cards and personal loans?

Credit card debt is “revolving,” meaning it can carry from month to month with no set end date. As long as you make a monthly minimum payment, generally a small fraction of the outstanding balance, you enjoy some freedom in when you pay back all the money you’ve borrowed on the card. That freedom comes with a price, however: higher interest rates.

Personal loans are fixed: You receive a lump sum of money, and you must pay it off in installments by a set date, usually a few years. The terms are stricter, but discipline is rewarded with lower interest rates.

Both can be used for a host of reasons, but your choice of which one to pursue should depend on which of the following two statements is true for you.

“I can pay the money back quickly”

If your need is immediate — say, to pay a bill before your mid-month paycheck arrives in your checking account — go with a credit card. Unlike a debit card or cash, where you part with your money right away, a credit card allows you a break until you have to pay up. It’s like free, short-term financing.

But “short term” is a very important qualifier. Before you use a credit card to cover your need, be sure you can pay off the balance in full by the due date. Otherwise, because credit cards come with a higher interest rate, you’ll end up paying quite a bit for the privilege of borrowing.

“I will need time to pay the money back”

If you need money for a bigger goal — a vacation, or perhaps you want to open your dream coffee shop — a personal loan from a financial institution such as Heritage Credit Union might be the better option. In these instances, you’ll need to pay back the larger loan over time. And in that case, you’ll do yourself a favor by choosing the option with the lower interest rates.

You can also use a personal loan to consolidate your credit card debt, that is, to combine your balances into one loan that may come with a lower interest rate. But before you rush to sign up, know that this isn’t for everyone. Consider carefully your specific situation before making such a move.

Both credit cards and personal loans can get you money when you need it. Knowing which route to choose rests largely on your answer to the question of how quickly (or not) you can pay back any money you borrow.


This is a guest article produced by Lynn Mucken, NerdWallet
© Copyright 2015 NerdWallet, Inc. All Rights Reserved



This entry was posted in Credit Cards, Loans, Marriage, Money in Your 20s, Money Tips for Parents. Bookmark the permalink.

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