Personal loans existed as a way for consumers to access short term credit long before credit cards were even invented. When they first became available, credit cards were actually charge cards which required the holder to pay off the entire balance next month. They became popular as a convenient payment tool and began being accepted by a growing number of merchants. Financial institutions then allowed consumers to have a revolving line of credit, which let them pay for their purchases over time. This has led to the credit card becoming the number one borrowing product for consumers and personal loans lost a lot of their appeal.
There are, however, several disadvantages to using credit cards. One of them is the psychological effect created by having the ability to purchase something without paying for it right away. A popular study in 2001 indicates that individuals would be willing to spend up to twice as much for the same exact product if they were using a credit card. This means that consumers are less likely to comparison shop in order to see whether they could get the same item at a lower price somewhere else. Furthermore, using a credit card can lead to impulsive buying where people purchase items that they don’t really need or may not even particularly want. All of this leads to consumers piling up debt faster than they would imagine.
Another big disadvantage of credit cards is the interest rate. Few consumers actually pay much attention to interest rates and banks are taking advantage of it. The rates on credit cards typically range between 13% to over 35%. If one doesn’t pay the full balance on their credit card statement, they start paying interest, which is exactly what the banks want.
Personal loans, on the other hand, have their unique set of advantages over credit cards. They come as a fixed amount that is given to the borrower in a lump sum and the interest rate on the loan is usually fixed for the entire term. The consumer can’t borrow more money without filling out an additional loan application, which discourages overspending.
The amount of the loan, plus applicable interest is paid back in equal payments over a fixed period, which can range between one to five years. In the majority of cases, there is no penalty if a borrower pays off the loan early or if they pay more than the regular monthly payment owed. Interest rates on personal loans will often be much lower than with credit cards.
A lot of consumers have now become aware of the positive aspects of personal loans and are increasingly using them to finance larger expenses, such as home or car repairs. Many new online lenders have appeared, offering personal loans with favorable terms and interest rates to consumers. Their growth in popularity has led to millions of individuals opting for a personal loan rather than putting a purchase on their credit card.