The advantages of a personal loan over a credit card

Unexpected expenses can be met more cost-effectively over time with a personal loan instead of a credit card. Image: Thinkstock

For borrowers with good credit, a personal loan could be a more sensible option than a credit card. In fact, more banks have been issuing personal loans as new credit card rules have caused consumer confusion and a rash of new fees and penalties. With planning and discipline, a fixed payment instead of payments based on average daily balance involved with revolving debt can save a lot of money.

A personal loan is simple

Before credit cards became so prevalent and heavily marketed, people went out and got a personal loan when they needed cash. Marlys Harris at MoneyWatch said that old-fashioned unsecured personal loans could be making a comeback. The advantages are obvious: no confusing rules and various rates for balances, purchases, cash advances, rewards or balance transfers. A personal loan is simple: borrow a specific amount at a fixed interest rate for a certain number of years. Make all the payments on time until it’s paid off.

Banks want to make personal loans

Banks are stepping up their promotions for personal loans. American Banker lists such institutions as Wells Fargo, Discover Financial, Citi and CapitalOne. Wells Fargo will lend $3,000 to $100,000 for up to five years. Citi will lend from $300 to $7,500. Harris wrote that because the personal loans are risk-based, the banks keep their rates secret until a borrower submits a form. A Wells Fargo spokesperson told Harris that her rate for a $10,000 five-year personal loan would be comparable to the rate on her credit card.

The best way to get a personal loan

If a person faces unexpected expenses like car repair or medical bills or would like to consolidate debt at a lower interest rate, a fixed payment (rather than a payment based on average daily balance)  is the primary advantage of a personal loan over a credit card. To get a personal loan, experts suggest the bank the borrower already has a relationship with could offer the helpful rate. But more people are finding that the best way to get started is online. A variety of information is available for free, including loan calculators to determine the total cost of a loan over its term. Plus, there are thousands of lenders competing for business on the Internet. Getting a personal loan online is simple, and there are usually no fees or costs other than the interest owed.