In the world of personal finance, credit cards and personal loans boil down to two main definitions:
Credit Cards – Credit cards are also known as “revolving credit.” That is, you have a set spending limit (say $1,000) which you can spend any way you choose. You can pay back any amount of your debt owed equal to or greater than the minimum payment, and then continue to use your credit. Your line of credit can also be increased (or, rarely, reduced) by your lender.
- The general idea of a revolving line of credit is that you have the ability to purchase small-ticket items when you don’t have the cash on hand. You make the purchase and pay off the debt (plus a little interest) when you have the cash available. When you make the minimum monthly payment you generally only pay off a very small portion of your debt and the rest of the money is the interest on your current balance.
Personal Loans – Generally a loan is a set amount of money used by a borrower to purchase a large ticket item (such as a house or car) that they could not normally purchase with cash or credit. Personal loans are a line of credit paid back over a fixed period of time (usually 12, 24, 48, or 72 months), and cannot be used again after the debt has been paid back (although the lender would be more than happy to let you borrow more money if you successfully paid back the debt owed).
- With a personal loan, you are loaned money that you may not be able to acquire in one lump sum for a larger purchase, and then pay off the debt in increments (usually monthly). It’s often recommended that you pay the agreed upon amount with each installment because there are often large charges for paying more (or less) than agreed.
So, which one is better: a credit card or a personal loan? The truth is that they both serve a very different purpose in our modern world. Revolving credit allows you to make small purchases when you don’t have cash on hand, and personal loans allow you to purchase larger items that you could not pay off in one lump sum.
[tags]credit cards, personal loans, debt management[/tags]