Personal and Installment Loans versus Credit Cards

In a world where all types of credit are accessible with just a few clicks on the computer or a swipe of a card, it’s important to know what you’re getting yourself into. We’ll walk you through the difference between loans and credit cards to help you make the best financial decision the next time you need to finance a purchase, no matter how large or small.

What are Personal and Installment Loans?

Generally speaking, an installment loan is a type of personal loan, but there are key nuances that differentiate the two. Most personal loans require a hard credit check and average or above average credit scores. The available loan amounts are usually larger and interest rates can be better since the credit requirements are stricter than other types of loans.

An installment loan, on the other hand, usually comes with a lower loan maximum. Where a personal loan could go all the way up to $35,000, most installment loans hover in the $1,000 to $10,000 range. Many installment lenders either don’t require a credit check or allow loans to bad credit borrowers. This usually results in a higher interest rate, making the loan costlier. At the same token, it opens up financing opportunities to people who otherwise may find difficulty in gaining access to credit.

Personal and installment loans both differ from credit cards in that they’re paid back over a set period of time. Rather than accruing ongoing interest, you have a set time-frame in which your loan is to be repaid. You borrow the money one time, and you then have a set repayment plan with a concrete end date.

How Do Credit Cards Affect Your Credit?

Like most personal and installment loans, credit cards can help your credit score by giving you a history of on-time payments. However, there’s more of a balance you need to be aware of to make sure you’re not inadvertently hurting your score.

For instance, a high balance can cause your score to drop and is viewed as a higher risk by lenders. You typically want to make sure your balance stays under 30% of your credit limit. If you need to make a large purchase that puts you over this amount, you may want to consider an installment loan instead, especially if you know you can comfortably meet the monthly payments each month. Otherwise, your credit score could drop and you may notice a rise interest rates either on your existing credit cards or when you go to apply for new credit.

Benefits of Using an Installment Loan

There are a lot of advantages to using an installment loan or personal loan as opposed to a credit card. Oftentimes, you can receive a much lower interest rate. While installment loan interest rates can be as low as about 6%, it’s much more common for credit cards to be well in the double digits, sometimes even pushing 20%.

Plus, installment loan and personal loans usually come with fixed rates, so you always know what your monthly payment is going to be. Once you’ve spent the money, you can’t incur any additional debt. With a credit card, on the other hand, it’s easier to fall into a debt cycle because once you pay off a portion of your balance, you can start charging again. If you need help sticking to a budget, or simply need cash for a one-time expense, you may prefer an installment loan.

Finally, as long as you stay current on your installment loan, it won’t hurt your credit score as much as a credit card will. The major credit bureaus view revolving credit as a less desirable type of credit than installment loans.

How to Use Personal Installment Loans to Consolidate Credit Card Debt

If you’re paying a lot on a high interest credit card and are tired of cyclical debt, it may be possible to save money with an installment loan or personal loan used specifically for debt consolidation. Here’s how it works.

You can take out a loan and use the cash to pay off some or all of your credit cards. Some lenders monitor the repayment process if the loan is strictly for debt consolidation, while others don’t have such stringent requirements. Rather than paying an open-ended balance on your credit card, you instead agree to a predetermined payment plan through your loan.

For this to work right, you need to make sure any fees and interest charged with the loan will still save you money compared to paying off your credit card. If that’s the case, you’ll save yourself a lot of time any money by avoiding major credit card debt and consistently paying down your personal or installment loan.

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