When people need to borrow money they often consider two different categories of credit – Revolving credit and Personal loans.
The most common form of revolving credit are credit cards, however those who own their own homes can also apply for home equity lines of credit.
Credit cards are generally used for daily expenses such as food, clothing and transport costs etc. The interest on the credit card is usually applied when the monthly balance is not paid in full, the interest rate varies from one lending institution to the next.
A personal loan is a form of credit typically used for a specific purpose and commonly for bigger ticket items, such as purchasing a vehicle, financing a holiday, consolidating debt, or renovating a home.
If you are approved for a personal loan, you receive the full amount straight away and usually begin accruing interest on those funds immediately. Whereas with a line of credit interest accumulation only begins once you actually make a purchase against the credit line.
With Personal Loans you borrow a specific amount and make regular repayments to your lender. By the end of your loan term, your loan is fully repaid.
A personal loan can be a less flexible form of credit than a credit card and typically does not offer additional benefits such as rewards and travel benefits etc.
Personal loans also have a repayment schedule, meaning you will eventually repay your loan in full at the end of a term and you can easily factor your repayments into your budget.
In Summary what makes Personal Loans Different?
- Under these forms of credit the consumer is required to follow a determined schedule which includes making regular payments covering both the interest and principal of the loan until it is paid off.
- The personal loan will generally have a fixed rate for the duration of the loan unlike many mortgages and other home equity lines of credit.
- Most personal loans have a fixed repayment period ranging from short term loans of usually around six months, up to terms of seven years. For those who enjoy the certainty of knowing when their debt will be paid off, a personal loan can be a popular choice.
- Credit cards are usually an unsecured credit facility meaning the funds are provided without using an asset as security. A personal loan can be either secured or unsecured, sometimes having the loan secured can reduce the interest rate which is applied.
- When applying for a personal loan with a lending institution they will require to know what the purpose of the loan is for, eg are you applying for a holiday, wedding, car etc. Whereas with a credit card with a credit card purchases can be made on a variety of items without providing the lender with a specific purpose.
The main benefit of a personal loan and what attracts many people to this option compared to a credit card, is that their interest rates can be lower and you have an allocated time frame in which to pay the loan back. This means that it’s often easier to pay off and you can avoid the possibility of getting stuck and not paying off all of your balance each month and accumulating extra interest.