Personal Loans vs. Credit Card Advances, Which Is Better?

Personal Loans vs. Credit Card Advances, Which Is Better?

December 9, 2015         Written By Jason Steele

Are you in need of a loan? If you are, then you must be aware you have several options including payday loans, a home equity line of credit, a personal loan, and a cash advance from your credit card. Many people don’t have the option of a home equity line of credit, either because they rent their home or because they do not yet have enough equity. And as for payday lenders, their loans can have interest rates in the triple digits, making this the most expensive option.

This leaves personal loans and credit card advances as two of the best options for many people. Let’s take a look at the pros and cons of each:

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Personal loans

A personal loan can offer the cash you need at a fixed interest rate and with a predetermined repayment period. These loans can feature interest rates in the single digits for borrowers with an excellent credit history, but the rates will edge up to the teens for those with fair or good credit.

These characteristics can be an advantage for some people. For example, many people prefer the fixed structure of a personal loan, and the knowledge that their interest rate will not go up. Furthermore, having a fixed monthly payment can be ideal for some users who prefer the commitment of paying off their loan with a specific timeframe rather than having the option of extending payment.

But at the same time, these conditions do have some drawbacks. Those who have a personal loan are unable to reduce their monthly payment in response to unexpected financial challenges. In addition, personal loans will require a new application for credit, which is time consuming and may not result in approval. Furthermore, a personal loan could have a higher interest rate than some of the most competitive credit card offers, depending on the creditworthiness of the applicant.

Credit card cash advances

Credit cards are most often used to make purchases from merchants that are part of their payment network, such as Visa, MasterCard, American Express, and Discover. But when cardholders need access to cash to make a payment to a person or business that doesn’t accept credit cards, then they need to make a cash advance. This can be done by using their credit card in an ATM machine, or by using a so-called convenience check that card issuers often mail to their customers.

There are some advantages to a cash advance from a credit card. For example, if you already have a credit card and some available credit, then you won’t need to take the time to apply for a new loan and risk the possibility of rejection. In addition, cardholders are largely responsible for setting the terms of their cash advance, at least when it comes to repayment. You can choose to pay any amount over the minimum balance each month, and set a payoff schedule that works for you.

Unfortunately, there are some significant costs associated with credit card cash advances. First, most cards will charge a cash advance fee, which is typically 3%-5% of the amount transferred. In addition, most credit cards will apply a higher, cash advance interest rate that applies to this type of transaction. So the credit card will have a standard interest rate for purchases, and a higher cash advance rate for ATM withdrawals and the use of convenience checks. And while most purchase incur interest at rates that are in the 10%-20% range, most cash advance rates tend to be between 20% and 30%.

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Which option is right for you?

If you already have a credit card, then you should carefully examine its terms and conditions before performing a cash advance. You should also look at some of the credit cards offered that have a lower interest rate and reduced cash advance fees. For example, the Barclaycard Ring® Mastercard® is one of the few credit cards that offers the same interest rate for cash advances that it does for purchases, 14.24% Variable. In addition, it charges a flat fee for cash advances of $3 rather than a percentage of the amount. This card has no annual fee and offers a forum where cardholders can ask questions to the product managers and participate in shaping the policies of the product.

It will also make sense to consider any personal loan options available. You should investigate the interest rates offered for the amount of money you need and the duration of the loan. You will also need to factor in other qualifications such as your credit score, you current income, and the state you reside in. Once you see what interest rates and terms are available, you can weigh this option against a cash advance from a credit card.

But in addition to shopping for the interest rate, you also need consider whether you want the flexibility to pay the loan back on your own terms, or if you prefer to have a fixed monthly payment schedule. By looking at all of these factors, you can choose the loan that best fits your needs.

The information contained within this article was accurate as of December 9, 2015. For up-to-date
information on any of the terms, cards or offers mentioned above, visit the issuer's website.


About Jason Steele

Jason Steele is a journalist that covers credit cards, travel and consumer credit. As one of the nation's leading experts in credit cards, Jason has contributed to dozens of travel and personal finance outlets including NerdWallet, Credit Karma and the Points Guy, where he serves as the Senior Points and Miles Contributor. Jason has also been widely quoted in mainstream media in outlets such as the Washington Post, the USA Today and Bloomberg Business Week. Jason is also the founder and producer of CardCon, which is the annual Conference for Credit and Credit Card Media.
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