Why use a personal loan instead of a credit card? The most popular reasons to take out a personal loan are for paying off credit cards and refinancing existing loans.
It’s all about the rate
Lowering the interest expense on outstanding debt makes it easier to pay down or pay off those debts. Bankrate tracks the national interest rate averages for personal loans, variable-rate credit cards and fixed-rate credit cards.
As I write this post, the Bankrate national averages are: 11.35% for personal loans compared with 12.52% for fixed-rate cards and 15.92% for variable-rate credit cards.
Amortized loans get paid down over time
Another reason to use a personal loan rather than a credit card is that most personal loans are amortized loans, and the monthly payment includes the monthly interest expense, as well as a principal repayment, which, combined, will have the loan paid off at the end of the loan’s term.
If you’re using the money for a specific purchase rather than as a revolving line of credit, it can be easier to budget for it in your monthly expenses. There are no impulse purchases allowed.
RATE SEARCH: If you’re thinking of paying off debt with a personal loan, you’ll find the best rates today at Bankrate.com.
The rate may be lower
Borrowers are often able to get a lower interest rate on a personal loan than they can on a credit card because the lender’s credit model can put a finer point on the way it prices the risk that loans won’t be repaid as agreed.
Although I’m oversimplifying the situation, it’s frustrating that cardholders with good credit can wind up subsidizing the cardholders who don’t have good credit.
In an interest-rate environment where banks can borrow at 0.25% to 0.5%, charging credit card holders an average of 12.52%, 15.92% (Bankrate’s national averages for fixed- and variable-rate credit cards), is a big yield differential between the bank’s cost of funds and the credit card interest rate.