Every now and then, businesses have to make large purchases or emergency payments, especially small businesses that need big financial sacrifices to get off the ground. Depending on the scenario, making that payment through a credit card may not be the best option. What can sometimes be a better alternative is making the purchase through a personal loan. 'Sometimes' is the key word to keep in mind, though. There are pros and cons to using personal loans over credit cards, and vice versa. You'll want (and need) to keep them in mind whenever your finances are tight in the face of big payments.
For using Personal Loans, you’ll want to keep the following in mind:
-Less negative impact on credit. Loans don’t have a credit limit, so you won’t need to worry about how you use your credit in the first place.
-Lower interest rates than credit cards.
-Fixed interest rates. This goes hand-in-hand with the consistent, predictable, and monthly frequency with which loans are paid off. Terms will vary, but you’ll always know what you’re paying.
-Limits your debt amount. Since there is a limit on what you spend and the duration of time that you spend it in, you have a safeguard from going overboard with spending.
-Not a revolving option. This means that since loans are fixed to be used for a certain period of time, you might not be able to pay for something additional that pops up.
-Higher monthly payments. Since loans have set term limits that determine how long they are usable, you may find yourself paying more month-to-month to pay off a large purchase.
-No perks or rewards that come with using a credit card.
Now, here are pros and cons to keep in mind for credit cards:
-Low Introductory rates. Some credit cards have a 0% annual introductory rate; if you can pay off purchases before this rate expires, you won’t have to pay any interest. You can even use the card multiple times before the rate expires.
-Rewards. If you have (at least) average credit, you can get cash-back, travel rewards, and/or points for your purchases.
-Longer terms. Since credit card payments are made based off billing cycles instead of a certain amount of time, you can prolong the time it takes to pay off your debt. This also means that monthly payments can be potentially lower for credit cards than for personal loans.
-More impact on your credit score if you have a high balance on your credit card.
-Variable introductory rate. Though some credit cards have a low introductory annual rate, some don’t. This rate can go up if you have a late payment on your credit card.
-Higher interest rates and possibility for debt if you don’t watch your spending.
The decision between personal loans vs. credit card ultimately depends on the business scenarios and the finances. Be sure to do more thorough research on what these options offer before you decide between them.