If you’re looking to borrow some money to finance a big purchase or consolidate debt, you may be scratching your head wondering which loan type is the best for you.
Should you take out a personal line of credit, auto loan, or, find a low-interest credit card? Which will cost less in the long run?
Credit card debt in North America is staggering, with average consumers carrying a combined $1.02 trillion of debt in the United States alone.
Personal loans can be sought from a number of creditors or banks and are typically used to consolidate debt or make big purchases, however, there are no real limits as to how you can use the funds.
Loans in this category are regularly unsecured, meaning that they don’t require you to put down collateral in order to secure the loan, unlike an auto loan.
Because the loan is unsecured and considered more risky to the lender, you may see higher interest rates than you would with a secured loan. Even with this higher interest rate, personal loans will still offer consumers lower interest rates – as low as 6% – than credit cards in most cases.
To get the lowest interest rate on your unsecured personal loan, an excellent credit score is key. Most lenders will have a personal loan minimum between $1,000 and $5,000.
As mentioned above, auto loans are secured against the vehicle or another form of collateral, such as a home. Since every auto loan will be negotiated a bit differently depending on the individual, loan terms will vary from case to case.
For a 60-month term, for example, Value Penguin found the average US auto loan interest rate to be 4.21%, which is even less than the average interest rate on a personal loan.
The amount you borrow for the vehicle will rely on the type of car, your credit, length of loan, and other risk-variables like your employment status.
Credit card interest
Credit cards offer consumers the option of borrowing or not borrowing money whenever they want up to their maximum credit limit.
According to data from credit bureau Experian (2015), the average credit card limit for Americans with “excellent” credit scores above 781 was $9,543 per credit card. Those with “good” scores below 780 averaged a $5,209 limit while “fair” scores below 601 saw $2,227 limits per card.
In Canada, the average interest rate on a credit card is approximately 19%, but can reach as high as 29.99% depending on your credit score and creditor.
Which is better?
If you know exactly what you need to purchase with your borrowed funds and you need more than a few hundred dollars, the personal loan option can look more attractive than the sky-high interest offered on most credit cards.
If you’re only looking to finance a vehicle, auto loans come in at a lower interest rate on average, without giving you more money than you need.
Looking at how long it will take you to repay the loan can also help you calculate your total interest.