Fixed Rate Credit Card Offers – Both personal loans and credit cards offer an opportunity to borrow funds that can be used for any expenditure. They share many similar characteristics, but there are also important differences.
With both personal loans and credit cards, you can borrow money from the lender at a fixed rate of interest. You make monthly payments that include principal and interest. As with credit, both types of credit can undermine your credit rating if not used responsibly.
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In the case of personal loans and credit cards, there are several important differences to consider, such as repayment terms.
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Banks, credit card companies and other financial institutions consider many factors when deciding whether to approve a loan. One of the most important factors is your credit score. Your credit score is based on your past credit history, including credit defaults, inquiries, bills and outstanding balances. You get a credit score based on that history, and that score has a big impact on whether you’re approved and at what interest rate.
The big three credit bureaus in the United States—Equifax, TransUnion, and Experian—lead in establishing credit reporting standards and work with the credit bureaus to approve credit.
Both paying off credit card balances and making personal loan repayments on time can help improve your credit score.
In the case of personal loans, lenders offer a lump sum that must be repaid over time, usually with fixed repayments that remain constant. Personal loans have a fixed tenure, usually two to five years, but sometimes longer.
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Personal loans don’t offer consistent access to funds like credit cards, but they have lower interest rates, especially for borrowers with good or excellent credit.
A personal loan can be used for any purpose. For example, you can use it to buy new appliances, consolidate credit card debt, make home repairs or improvements, or finance a vacation. Personal loans are generally unsecured, meaning they are not backed by collateral.
Personal loans usually include an origination fee and other fees. This can increase their total cost.
Revolving credit gives borrowers access to a fixed amount up to the credit limit. But you will not get this amount in full. Instead, you can use the money you need. You only pay interest on the funds you use, so you can get an interest-free open account if you don’t have a balance.
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Unlike personal loans, where the monthly payment remains the same throughout the entire repayment period, the credit card bill changes each month. How much you pay depends on your balance and interest rate. There is a minimum payment, but usually you don’t have to pay the full balance. The remaining amount will be transferred to the next month and interest will be charged.
Many credit cards offer benefits such as rewards or a 0% introductory period. They provide convenience while shopping as they can be used at retailers or online shopping or any place that accepts electronic payments. Over time, your credit limit may also increase.
Among their drawbacks, interest rates on credit cards are usually higher than personal loans. And some have monthly or annual fees.
Most credit cards are unsecured, but borrowers with bad or no credit can use secured cards, which require a deposit used as collateral.
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Credit cards have different ways to earn interest. Some credit cards offer borrowers the benefit of a statement cycle grace period during which no interest is charged on borrowed funds. Other cards charge interest daily, including a final interest charge at the end of the month.
If you have a credit card with a high interest rate and are struggling to pay the balance, you can transfer your balance to a card with a lower interest rate.
In addition to personal loans and credit cards, you can also choose from other types of loans and credit products. The right category for you depends on your financial situation. Here are some examples:
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The monthly cost of a $5,000 personal loan depends on the interest rate and the length of the term. With the help of an online personal loan calculator, you can determine the monthly cost of the loan taken under different conditions.
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If your credit score is too low, your income is insufficient, you have too much debt, or you don’t meet any of the lender’s other criteria, you may be denied a personal loan.
Applying for a personal loan is short-term and can make your credit rating a bit worse. Once you get a loan, payment patterns can affect your credit score. Making all required payments on time will benefit your score. If you don’t pay on time, your score may drop.
While personal loans and credit cards can help pay for your expenses, keep in mind that they are not the same thing. Interest rates on personal loans are relatively lower than credit cards, but they have to be repaid within a certain period of time. Credit cards give you continuous access to funds, and you only pay interest on outstanding balances.
Whether you choose one or both, your credit score is key to getting approved and getting favorable terms.
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So how do you decide? Here’s an overview of the differences between fixed and variable rate loans and credit cards, including how they work and how to decide which one is right for you.
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In case of fixed interest loan, the interest does not change. You will get the interest rate when you get the loan, and the interest rate and monthly payment will remain the same throughout the repayment period.
A fixed monthly payment makes it easier to budget and avoid payments. But in return for that predictability, fixed-rate loans often come with higher initial interest rates than variable-rate loans.
For loan products with variable interest rates, the interest rate may increase or decrease. These movements are tied to changes in the base index (discussed below), and depending on the terms of the loan or credit card agreement, the interest rate may reset on a monthly, quarterly or annual basis.
When interest rates reset, so does the amount associated with your monthly loan payment or credit card balance. This can make it very difficult to create a monthly budget that you can stick to. Variable rate loans typically have lower initial rates than fixed rate options because of the risk of rising interest rates increasing your borrowing costs.
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Most variable rate loan products are linked to an underlying interest rate index such as the prime rate or the London Interbank Offered Rate (LIBOR). If the benchmark interest rate goes up, the interest and monthly installments on the loan will also go up. But the opposite is true – if these interest rates decrease, the loan interest rate and monthly payment will also decrease.
Almost all credit cards have a variable interest rate linked to the base rate. When the Federal Reserve raises interest rates, the prime rate also rises. This means that the interest you pay on your outstanding balance and minimum balance can increase immediately with the next month’s payment.
Most lenders have limits on variable rate loans to limit rate increases over time. If it’s a lifetime limit, the interest rate won’t go above a predetermined rate — no matter how much the index rises over the life of the loan.
To determine whether a fixed-rate or variable-rate loan or credit card is right for you, you should evaluate the interest rate environment.
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