Get By In an Emergency: Personal Loan or Credit Card?

Unexpected expenses, as their name indicates, can come out of nowhere...

•  Paid off the car, and now the check engine light comes on
•  Your air conditioner quits during the hottest summer on record 

These little headaches all have one thing in common: They're expensive.  Now, what?  How will you begin to pay for this? 

The best financial advice suggests a rainy day fund for situations like these. However, for many people, they simply haven’t been able to save enough to cover unexpected events.

A Federal Reserve survey found that 47% of Americans would not be able to come up with $400 in an emergency. So what would you do – borrow?

 

You have options when it comes to borrowing.
Two of the most popular choices for emergency funding is a emergency personal loan and a credit card.

There are pros and cons to both, so let's take a look at a few.

 

1. Limits

Credit cards are designed to cover day-to-day purchases. They have credit limits in the thousands, which is enough to handle most small appliance purchases and some car troubles. Most of the value of credit cards is in the convenience, though. Because it's a credit line you can use as needed, there's no need to apply for a new loan each time you incur an expense.

However, many people may not have a high enough credit limit to cover a major medical expense, a significant home repair, or a big appliance.  This is where many choose to utilize a personal loan.

Personal loan approval amount depends on several factors, such as your income, credit score, and other assets. For borrowers who have a good credit history and a strong ability to repay, these loans could amount to tens of thousands of dollars.  That's enough to cover most serious expenses that come up out of nowhere.

 

2. Repayment options

Credit card repayment is typically handled on a monthly basis. You'll have a minimum payment, which, if you've got a high balance, might take a long while to pay off. There's no fixed term to repayment; so if you continue to charge while making only minimum payments due, paying off your loan can take forever.

A personal loan, on the other hand, will include a fixed monthly payment that will let you repay the loan in a set amount of time. You'll sign paperwork at the beginning of the term, which spells out exactly when you'll be done repaying the loan. There's no penalty for early repayment, either. So, if you find yourself ahead of schedule, you can pay off the balance and save some money!

Since the repayment period of a personal loan will generally not run longer than a few years, the monthly payments are typically higher than credit card payments.  With a personal loan, you will have a clear path to paying off the debt.

 

3. Usability

Credit cards only work at a merchant terminal.
While they're accepted in many places, they are not universal. If you're trying to pay family or friends, a credit card may not be the easiest way to get it done.

A personal loan is usually deposited directly to your account.
Although you'll usually be sending it directly to the entity you owe, the money is yours. You can withdraw it as cash, write checks, or use auto draft features.

 

4. Interest rates

Credit card interest rates can be high.
Some credit cards may offer introductory rates that are considerably lower, but at the end of that introductory period, the whole balance is converted to the higher interest rate - meaning you will be charged more interest on what has not been paid off.

Some credit cards also have variable interest rates that can go up or down based on the prime rate. Fluctuations in your interest rate can make it difficult to plan for your financial future.

Interest rates on personal loans also tend to be much lower than on credit cards.
For people with average credit, interest rates can be as much as 5% lower than those on credit cards. For people with better credit and higher incomes, that interest rate may be even lower.

A personal loan has a fixed interest rate at the time you get the loan.
Provided you don't miss a payment; your interest rate will never increase. You can make a budget for the future that involves paying a fixed amount over roughly a 5-year period.

 

Before you end up between a rock and a hard place, know your emergency borrowing options and the best solution for you.  Contact a Genisys Financial Services Representative to show you what might be the best financial solution for your unexpected expenses.

 

© Genisys Credit Union and www.genisyscu.org, 2018.  Unauthorized use and/or duplication of this material without express and written permission from this site’s author and/or owner is strictly prohibited.  Excerpts and links may be used, provided that full and clear credit is given to Genisys Credit Union and www.genisyscu.org with appropriate and specific direction to the original content.

 

SOURCES:
https://www.nerdwallet.com/blog/loans/cheap-personal-loans/
http://www.valuepenguin.com/average-credit-card-interest-rates
https://www.nerdwallet.com/blog/credit-cards/credit-card-issuer-raising-interest-rate-5-times/
http://www.theatlantic.com/magazine/archive/2016/05/my-secret-shame/476415/

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