If you need to borrow funds to cover expenses, then you may have thought about taking out a home equity loan, personal loan or credit card. The option you choose is contingent upon your situation. Credit cards are great for short-term expenses. However, if you have a long-term expense, then you may want to take out a personal loan. Home equity loans are available for homeowners. They allow people to take out a loan and use their home as collateral.
Personal Loans, Home Equity Loans or Credit Cards?
Credit cards can be very expensive. In fact, the interest rates are often in the double digits. You will be required to make a monthly payment, which is typically one to three percent of the total balance. However, you will have to pay the balance in full if you do not want to pay any interest.
Credit card is a type of revolving debt. A limit is set on the card. A credit card is unsecured, which means that you will not have to use any collateral. Personal loans can be unsecured or secured. Unsecured loans typically have higher interest rates.
Personal loans typically have lower interest rates than credit cards. That is why they are a great option for people who have excellent credit. You will get a lump sum of money, and you will have to make payments every month. The term limit can vary, but personal loans are typically paid off within two to five years.
A home equity loan allows you to get either a line of credit or a lump sum. You can borrow as much as you need. You will only have to pay interest on the amount that you borrow. Home equity loans are tax-deductible.
When to use a Credit Card
Credit cards should only be used for short-term expenses because they have such high interest rates. Use a credit card for things that you can pay off in full by the due date. Many credit cards also have a rewards program. Ideally, you want to pay the full balance each month. However, if your credit card does not have any interest, then you can take your time paying off the balance.
When to get a Personal Loan
Personal loans are better for long-term financing. You can use a personal loan for things such as starting a business or adopting a child. If you want to get a personal loan to consolidate your debt, then you should think about how long it will take to pay off all of your debts. A personal loan is a good option if it will take you at least six months to pay off the debt.
What’s the Bottom Line?
Personal loans, credit cards and home equity loans differ in payment amount, interest rate and the type of debt. If you want to pay the full balance every month, then a credit card is the best option. Home equity loans and personal loans are the best option if you need more time to pay off your debt.