Credit Cards vs. Personal Loans

November 30th, 2009 by Reed Allmand

As credit card companies increase interest rates and fees, many credit card consumers are looking for alternative sources of credit.  Even personal loans are given a second look due to their lower interest rates.  But what is a personal loan?  A personal loan is an “unsecured” credit line which is similar to “secured” loans in that there is a fixed amount of credit available and a finite time period to repay the loan. For example, you might borrower $15,000 to remodel your home using a personal loan.  That $15,000 is only available once and must be repaid over a set period of time which is determined before you borrow the money. On the other hand, credit cards are revolving credit lines. With a revolving line of credit the amount of the loan is available “indefinitely” as long as the card is paid in a timely matter and the account remains open.

One of the biggest benefits of personal loans is that borrowers are unable to get trapped into a minimum payment cycle where they pay just the minimum while continuing to use the card. Many credit card borrowers who are trapped in the minimum payment cycle end up filing bankruptcy because they can no longer pay their debts.  When borrower receives a personal loans he/she must agree to repay the loan by a set date and those specific terms of repayment (amount, due date etc) are predetermined. Unfortunately for borrowers who are experiencing massive credit card debt, personal loans may not be an option because they require borrowers to have good credit. However, debtors who have emerged from bankruptcy may be able to secure a personal loan a few years later if they take the proper steps to improve their credit rating.