How to Pay for a Costly Surprise

Some surprises can be fun.  Others, not so much.  It would be an awesome surprise to learn that you won a new car with the raffle ticket you forgot you bought.  It’s a bummer surprise when the car’s “check engine” light results in a $500 repair when you can least afford it.

Finding out that the affordable house you’ve been eyeing has a swimming pool would be a pleasant surprise.  Waking up to find that your sump pump failed and there’s a pool forming in your basement is the kind of surprise we can all do without.

It’s easy to deal with good surprises, but unexpected disasters can really cause us heartburn, especially when they result in unanticipated expenses and funds are short.  Don’t panic. You have options when it comes to borrowing to pay for a costly surprise.  Two of the most common solutions are personal loans and  credit cards.  There are advantages and potential drawbacks to both. 

How much credit can you get?

Credit cards can be an excellent solution for funding a major expense when you don’t have savings.  However, most credit cards come with a “credit limit” - a maximum balance you are allowed to borrow before your credit card transactions begin to be denied.  Depending on the surprise, you may not have enough credit available to cover the expense.

Personal loan amounts available will depend on several factors.  How much do you earn? How strong is your credit history? Borrowers with a good credit score and an ability to repay may find that a personal loan provides more funds than their credit card.  

 

Which credit option will best help me to pay off the debt?

Paying off a credit card balance can be a little tricky.  You will have to make a monthly payment, and there will be a payment amount included with each monthly statement.  However, the amount shown is a “minimum payment.” If you just make the minimum payment, it may take years to get that loan balance down to zero.  If you continue to charge other purchases while only paying the minimum, your owed balance will increase over time rather than disappear. You should pay more than the minimum if you’re serious about paying off the debt.  

A personal loan works differently.  When you get the loan, you will be agreeing to a fixed monthly payment over a set period of time.  With this plan, you know exactly when you will be paying off the loan. WIth a repayment period of just a few years (usually not more than five), you will have a higher monthly payment than the minimum amount required by a credit card.  Make sure you’re going to be able to meet the monthly obligation of a personal loan so that you maintain your good credit score.

 

What’s most convenient for the transaction?

Since you have already been approved for the debt, you can get repairs or other emergencies quickly resolved when you pay using your credit card.  While plastic is accepted in many places, it’s not a universal solution. If you're trying to pay family or friends, a credit card may not be the easiest way to get it done.

The funds from a personal loan are often deposited directly to your account.  You can withdraw it as cash, write checks, or use auto draft features to make your payment.

 

What about the cost of each option?

Credit card interest rates can be higher than the cost of personal loans.  Some credit card accounts offer attractive introductory rates.   Once the initial period ends, 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.

 

For people with average credit, personal loan interest rates can be as much as 5% lower than those on credit cards. For people with better credit and higher incomes, that differential may be even more significant.  Also, keep in mind that a personal loan has a fixed interest rate. That makes it easier to budget your payments over the loan term.

It’s a smart goal to have enough savings to meet any surprise, but things don’t always work out that way.  Know your credit options in advance of an emergency. Contact a Genisys Financial Services Representative today.  
 

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