When to Consider Personal Loans |

You can use personal loans to cover a multitude of expenses, but you may wonder when a personal line of credit is actually better for your needs than a credit card. In fact, as the economy has worsened, consumers are finding it more difficult to obtain a personal loan and more difficult to use a credit card. You need to make sure you are using the right kind of credit for every monetary situation. Before filling out an application for personal loans or pulling your credit card out of your wallet, this is what you need to know about personal credit lines.

Personal Loans 101

A personal loan is a line of credit that you obtain from a lender, such as a bank, or from a family member or a friend. The loan funds can be secured by collateral, making it a secured loan. It can also be made without collateral, making it an unsecured loan. Generally speaking, a personal loan has a relatively low interest rate, topping out at about 10%, and lengthy payment terms averaging about five years. These loans have been more difficult to get during the recent recession but secured loans have gotten easier to obtain because they pose a lower risk to the lender.

Credit Cards 101

A credit card is a kind of personal credit line, in which a financial institution gives you a certain amount to spend with a credit limit, or topping amount you can charge. Credit cards are a kind of unsecured debt, and as such, carry a higher interest rate than personal loans, usually averaging between 17% and 32%. The payback terms can vary but you are generally required to make a minimum payment on your balance every month, and interest is charged on the remaining balance. Credit cards used to be very easy to obtain but recent changes in government regulations in the credit card industry have made them harder to get.

Which Line of Credit Should You Use?

You may wonder which kind of credit works best for your needs. A personal line of credit is usually used for a one-time expense that requires planning, such as a vacation, home renovation or repair, or debt consolidation. A credit card is usually used for recurring expenses, such as medical bills, clothing, entertainment, or sudden emergencies that require immediate payment. If you have time to make a loan application and wait for your personal loan to be funded, you will have more time to pay back the loan and will pay lower interest on the balance. If you need immediate help and cannot wait for a loan request to be processed, you should consider using a credit card.