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Preparing For Big Purchases: Credit Card Vs. Personal Loan

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Preparing For Big Purchases: Credit Card Vs. Personal Loan

When making a big purchase, it's almost always better to pay for it upfront in cash from your savings account. But sometimes, life happens, and you have to pay for a big purchase without having savings prepared.

In that case, you might immediately reach for your credit card, but there are times when a personal loan might be a more affordable option to pay for an expensive item.

Here are the pros and cons of a personal loan versus a credit card when making a large purchase.

When Is A Credit Card Better Than A Personal Loan?

Credit cards might be better for making smaller purchases, or if you need to consolidate smaller debts. These debts should add up to less than a few thousand dollars, and you should be able to pay them back within the year.

If you need to make a purchase of a few thousand dollars that you think you can repay in a year, a credit card can be a good option. You should choose a credit card, like the Double Cash Card from Citi (NYSE: C), which offers a 0% intro APR on purchases. This means you essentially get an interest-free loan as long as you pay the amount back in full before the end of the introductory period and have good credit.

Plus, many cards let you earn rewards based on your purchases. That large purchase can help you earn airline miles, free hotel stays, cash back and other rewards.

When Is A Personal Loan Better Than A Credit Card?

Personal loans are often preferable when you need to make a large purchase that you won’t be able to pay back within the year. You might also want a loan over a credit card if you have struggled with sticking to a budget in the past, and might be tempted to overspend and abuse the new credit line.

Many credit cards put a limit on how much you can spend without paying back at one time.

Therefore, if you need to make a large purchase that is higher than your credit limit, you won’t be able to put it on a credit card. A loan will be a better option in that case.

The biggest negative to using personal loans is that some places might charge you a fee of 1% to 5% of the total loan fee. Make sure to check with the loan provider, because not all lenders will charge this origination fee on personal loans.

Before deciding if a credit card or loan is right for you, research to make sure you have to pay the least back in fees and interest. Read the terms and conditions carefully so you aren’t caught by surprise when paying back your big purchase.

Posted-In: Education Personal Finance General Best of Benzinga

 

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