Do you need to borrow some cash to sort out an urgent project and you don't currently have money to cover the cost of the project? Am sure you might decide to consider getting a credit card loan, a personal loan to help sort out the current project needs or even consider a home equity loan. But going ahead to decide which of this loan you think is better depends on your situation. Credit cards loans are the most ideal for short-term balances that you can decide to pay off each month, while personal loans on its own are loans collected for medium- or long-term debt. While getting a Home equity loans are available to only homeowners who can decide to take a loan against the equity in their home.
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Credit cards vs. personal loans vs. home equity loans
Credit cards loans happens to be one of the most expensive forms of financing, that's because it has interest rates in the double digits. Every month on your credit card’s payment due date, you’re supposed to make a compulsory minimum monthly payment — which is most times generally around 1% to 3% of the loan balance — but it will be in your best interest to pay it off in full so as to avoid accruing interest on the loan. Interest on credit card loan is calculated based on the average daily balance during the course of the month, and not using the ending balance.
Credit card loan debt is “revolving” debt. There is a limit on how much debt you can incur on the card; the total amount of credit you have available on the card from month to month depends on how much you have to spend and how much you have to repay.
Generally, credit cards are just so unsecured, which means they are not backed by any means of collateral. Personal loans on its own could be secured by an asset or unsecured, but getting an unsecured personal loans come with a much higher interest rates.
Getting a Personal loans, either secured or unsecured, often have lower interest rates compared to getting a credit cards loan, especially if you have good credit. Unlike credit cards loans, getting a personal loan gives you a large sum, and you can make equal payments of the loan over a specified period of time until you are able to settle the loan — this payment is usually between two to five years. Paying back your personal loan payments will include principal and interest.
To qualify for a home equity loan you have to be a home-owner and be ready to use your home as collateral. You can get a large sum with this type of loan and can also get a home equity line of credit (HELOC), this allows you to borrow cash as you need it and you then onlyhave to pay interest on the amount you have borrowed. Just like getting a mortgage, the interest on getting a HELOC or home equity loan is tax deductible.
When you should use a credit card
Because of the high interest rates on getting a credit card loan, they are best reserved for getting a short-term loan financing. Make sure you use a credit card only for purchases that you are sure you will be able to pay off by the due date, like using for some daily expenses or for monthly bills.
You can use physical cash or use your debit card for making these same purchases, but note credit cards also have benefits outside of free short-term financing. Many credit cards come with some cash or travel rewards — that could be ranging from 1% to 2% of what you spend using the card— and also some other certain perks you would not get with paying with cash or debit.
All that said, it is best if you pay off your balance in full each month. If you have a 0% interest credit card, you can decide to take all your time paying off purchases. But, it is better you have a plan to pay off the entire balance on the card before the introductory 0% APR period ends, because you could get hit with an interest on your remaining balance, you can also get a retroactive interest on your initial balance.
When you should use a personal loan
Getting a Personal loans is best when you are considering a longer-term financing. This loan could be gotten for some expenses like when adopting a child, or when you are looking at starting a small business or paying off a card loan or other debt. Personal loans have better interest rates when collected than credit cards loans, they are a better option if you know you wont be able to pay off your loan balance in full monthly.
If you are considering getting a personal loan to consolidate credit card debt, first make sure that you assess how long it will take you to fully pay off the debt. Consolidating credit card debt by getting a personal loan only makes sense if it would take you more than six months to pay off the personal loan. Otherwise, the amount of interest rate you will save will be negligible at best for the amount of effort to obtain a loan.
The bottom line
Getting a Credit cards loan, personal loans and home equity loans have there differences when considering type of debt, also the interest rate on them differs and also payment amount. If you have plans to pay off your loan balance in full by each month, then getting a credit card is your best choice. If you are looking at paying back between two to five years, then getting a personal loan or home equity loan is just the best the way to go.
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