We know unexpected expenses, by nature, can come out of nowhere. Your check engine light comes on, and your car requires you put another thousand dollars into keeping it on the road. Or, your air conditioner gives up during the longest heatwave you can remember. No matter what causes these personal catastrophes, they all have one thing in common: They’re expensive. So how do you pay for these expenses?
The best financial advice suggests a rainy-day fund for situations like these. However, for many people, that’s just not practical. Just getting to the end of the month can sometimes feel like an emergency. An emergency fund would be nice to have, but sometimes there’s just no room for it after the bills have been paid.
You're not alone if you feel the pressure of not knowing where your emergency spending could come from. A Federal Reserve survey found that 47% of Americans could not come up with $400 in an emergency. The way they’d cope with that emergency? They’d borrow.
As a credit union member, you have options when it comes to borrowing. Two of the most popular choices for emergency funding are a personal loan and a credit card.
Below, we’ll outline some pros and cons to consider for both options.
1. Limits
Credit cards are generally designed to cover day-to-day purchases. They have credit limits in the thousands, which is enough to handle most small appliance purchases and some car troubles. Most of the value of credit cards is in the convenience, though. Because it’s a credit line you have that can be used as needed, applying for a new loan may not be necessary each time you incur an expense.
However, many people may not have a high enough credit limit to cover a major medical expense, a significant home repair, or a big appliance. This is where many choose to use a personal loan.
Your personal loan approval amount depends on several factors, such as your income, credit score, and other assets. For borrowers who have a good credit history and a strong ability to repay, you could borrow up $50,000 with Jovia. That’s enough to cover most serious expenses that come up out of nowhere.
2. Repayment options
Credit card repayment is typically handled on a monthly basis. You’ll have a minimum payment, (which includes a portion of what you charge and interest) which might take a while to pay off if you've got a high balance. There’s no fixed term to repayment, so paying off your card can take a long time if you continue to charge while making only minimum payments due.
On the other hand, a personal loan will include a fixed monthly payment that includes a portion of the amount you borrowed and interest that will let you repay the loan in a set amount of time. You’ll sign loan note at the beginning of the term, which spells out exactly when you’ll be done repaying the loan. The loan is amortized so you’re making equal payments to cover both interest and principal over the life of the loan. There’s no penalty for early repayment, either. So, if you find yourself ahead of schedule, you can pay off the balance and save some money!
3. Usability
While credit cards are accepted in many places, they are not universal. If you’re trying to pay family or friends, a credit card may not be the easiest way to get it done.
A personal loan is deposited directly to your Jovia Checking account. Although you’ll usually send the funds directly to the entity where the money is owed, it is yours. You can withdraw it as cash, write checks or use auto draft features.
If you’re trying to work out a reduced price for a major expense, many businesses are willing to offer a cash discount. Businesses pay for processing credit card fees, which can be quite a bit of money so a cash payment can work to the advantage of everyone. If you’re working with a hospital on a medical expense or a dental office, they may also be willing to negotiate a lower fee in return for cash payment.
4. Interest rates
Credit card interest rates can be high since they are based on a prime rate plus a margin. Exactly how high depends upon your credit score and the kind of card you have, in addition to what the current prime rate is. While some credit cards may offer introductory rates that are considerably lower, at the end of that introductory period, the whole balance is converted to a higher rate.
Credit card companies are allowed to change your interest rate if your credit score changes dramatically. Fluctuations in your interest rate can make planning for your financial future difficult.
A personal loan has a fixed interest rate at the time you get the loan. Provided you don’t miss a payment, your interest rate will not increase. You can make a budget for the future that involves paying a fixed amount for a fixed period of time.
As a member of Jovia Financial, you have access to competitive rates for personal loans and loans in general. And you’ll also have access to a credit card with a low introductory rate, like our Visa Advantage card. Learn more about our Visa Advantage card.