There are some who believe that financing is evil and that it’s foolish not to pay cash up front for all of your needs. Logically, you can understand this argument. In reality though, the demands and desires of life don’t fit neatly in to that box. So, how can you try to minimize interest charges so that it doesn’t bust your budget?

A Personal Loan Versus a Line of Credit

Many people have a credit card they use for everyday purchases – gas, groceries, incidentals, etc. However, when you slap a large purchase on the card, you probably will continue to make the same or similar monthly payment, but now your balance is much higher. As other purchases are made with the card, the balance becomes a melting pot of charges, stewing month after month!

Your visibility to that large charge made six months ago and how it is being paid down is virtually non-existent. All you really see is the “balance due” and have no idea how much interest has incurred for that purchase six months ago, let alone how much will be incurred going forward.

A personal loan, on the other hand, provides you a fixed payment for a specific period of time. After the last payment, you owe nothing more for that purchase. It’s clear, visible, and certain.

The Differences of Financing Charges

When you take out a loan for a large purchase, you know what the interest rate is and the length of time you have to pay off the loan. You also know exactly what your monthly payment will be in order to pay it off as scheduled. This makes the maximum cost for financing that purchase known up front.

A credit card, on the other hand, is variable. Yes, if your credit is really good, you may receive a promotional period of 0% interest. But, for most consumers, those promotions either don’t exist or have a short period of time they are good for. Then, the interest rate shoots up.

Credit card interest rates are usually tied to a floating index, such the prime rate. This means as interest rates fluctuate, so does your credit card interest rate. I’m guessing that most people don’t look at the interest rate being charged each month on their statement. Inevitably, it varies from month to month.

Keeping a Lid on Finance Charges

With credit card interest floating over time, it is quite possible it will increase well above the rate established when you took out the line of credit.  The benefit of a fixed rate personal loan is that it is has a fixed, known interest rate. Also, like a credit card, you can pay more each month or in a lump sum to pay the loan off early, with no pre-payment penalty. On a three year, $5,000 loan with an interest rate of 14.99%, paying off twelve months early can save you $160 in interest charges.

 

Unless you have serious discipline and can pay off your credit card debt each month, the likelihood is that you will pay more in interest charges over time by charging with a credit card rather than with a personal loan. Check rates out for yourself without having your credit affected.

 

~ David Weyher