If you’re asking whether personal loans are better than credit card debt, then my quick answer (with conviction) is a big YES! Especially when it comes to financial risks, the plastic cards can definitely drown you to poverty if you’re not careful about managing your finances. In fact, I know many people who don’t even want to talk about applying for a credit card for fear of unmanageable debt in the future.
Although you can enjoy some benefits when using credit cards, they still glaringly pale behind personal loans in many ways.
Sticking to a budget is harder with credit card debt.
The fact that credit cards don’t offer fixed terms means that you need to make constant adjustments to your budget month after month. Even if you’re so meticulous about writing down every expense you incurred through the cards, you still need to give a little more allowance to be on the safe side because the computations that credit card companies use can be confusing and overwhelming for an ordinary person.
With personal loans, a lot of the important factors such as the payment schedule and amount due each month are known. Thus, you can plan your budget accordingly.
Credit card rates are shockingly higher than personal loans.
The average monthly interest rate of credit cards in the Philippines is around 3.5%. It may sound small to you, but if you make the calculations, it’s actually 42% a year! It’s even more at the end of the year considering that your balance is compounded month after month. It would be too late before you realize that your debt has become an uncontrollable monster.
On the other hand, a personal loan can go around 20% APR and you’ll be paying a fixed amount each month. So your P20,000 loan only sums up to P24,000 at the end of the year with monthly payment obligation of around P2,038 if the loan is good for a year.
Credit cards are not for those with poor self-control.
Owning credit cards can lead to a vicious cycle of debt when you lack self-control. For one, it’s tempting to just pay the “minimum payment required” of the current bill even if you can afford to pay the entire debt, thinking that you can use the cash for “more urgent” things. Second, the thought of having more purchasing power with the cards can encourage spending a bit more than you usually do when paying in cash.
Credit card companies, being business-oriented entities, will typically entice you to use your card in a variety of ways. On the contrary, personal loan providers, which are generally small businesses in the community, will provide mechanisms to ensure that you won’t miss out on your payments so you can avoid incurring penalty fees.
Missing a payment can be disastrous.
Not being able to pay your credit card due on time can start a snowball of financial disaster. When you miss a monthly payment, you get a whooping late payment charge (usually amounting to whichever is higher between P500 or 6% of the amount due). This fee adds up to your ongoing interest rates and gets compounded again on the next month.
In short, your credit card debt can grow so huge before you know it. With a personal loan, on the other hand, you can have an additional fee of around P400 on top of your principal of P20,000 for every month you miss your payment.
I’m not saying that you completely avoid owning credit cards. There are also benefits to having them especially for urgent expenses. But if you have the means to take out personal loans, then apply for them rather than swiping your plastic cards.
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