There are many people who have been struggling with credit card debt and have ended up taking out personal loans for consolidation when they found it impossible to repay on their own. If you have unpredicted emergency expenses and some major car repair and you see that you don’t have a savings fund ready, a personal loan can definitely be a better option than whipping your plastics. However, if you’re still in the dilemma of whether to use personal loans or swap your credit cards, you’ve clicked on the right post. Read on to know which one is a better option.
Personal loans – What they actually are
Personal loans include both secured and unsecured loans which are lent by either banks or credit unions. A secured loan is that type of loan where the lender needs you to offer some valuable property as collateral to the loan so that the lender can seize the property in the event of a default. An unsecured loan functions in the similar way as a credit card and this debt is not backed by any valuable asset. Your signature is everything that backs this loan. Unsecured loans are less risky for you as you don’t stand the risk of losing any valuable property to a repossession or foreclosure.
The difference between credit cards and unsecured loans
The only difference between credit cards and unsecured personal loans is that personal loans offer you a fixed repayment period within which you have to pay back the money which you borrowed. Credit cards, on the other hand, give you a credit limit and you can borrow as much as you want and also as little as you want. You can even repay the minimum balance on your cards every month.
There is an advantage of using a personal loan for consolidating your debts as you get a fixed payment every month. Since this option is not there for credit cards, there are many borrowers who make the mistake of paying only the minimum payments every month. The only possible pitfall of using a personal debt consolidation loan is that depending on the total amount of debt that you consolidate, you may end up with higher payments at the end. This might not have been possible with credit cards.
When is it right to take out personal loans?
A personal loan is usually the best choice when:
- You require paying off a one-time urgent expense like major car repairs or home renovation costs.
- You get a lower rate on a personal loan than what you’re currently paying on your credit card.
- You wish to combine all your debt and pay back all your debt through single monthly payments.
Hence, if you’re going through any of the above mentioned situations, you can take out easy personal loans to combine your debts and stay off the edge of debt.