Financial Advice

Understand Your Credit

TOPICS

Credit 101: Ways to Borrow Money

When you need to borrow money, do you know what options are available? If so, have you struggled to decide which one might be best for you? There are many types of loans available to help you live your best life, and we’d like to help you understand the distinct differences between each of them, so you can make an informed decision before you take on debt.

Quick Reference Loan Comparison

Questions to Consider Credit Cards Lines of/
Revolving Credit
Personal/
Signature Loans
What is this kind of loan ideal for?

Earning rewards, paying vendors who only accept credit

Overdraft protection, long-term access to cash for unexpected events

Access to cash for unexpected events

What's the unique benefit of this kind of loan?

Credit cards accepted globally

Quick access to cash at any time

Equal monthly payments and a scheduled final payment date

How long does it take?

Longer process for approval and receipt of the card

Quick process

Quick process

How will I access the funds?

Cash advance by check or via ATM

Direct transfer to checking or savings account from line of credit

Direct deposit into checking or savings account

How much money can I access?

25% of credit card limit

100% of loan balance

100% of loan balance

What will my interest rate be?

Rates vary based on credit score, but if you only make the minimum payment, interest over time can be expensive

Fair: Generally higher than auto loan rates; rates vary based on credit score

Fair: Generally higher than auto loan rates; rates vary based on credit score

How will interest charges be applied?

Interest starts accruing the next day on cash advances, and the next billing month for purchases made by the closing date of your billing cycle when the balance is not paid in full

Interest accrues daily based on your principal loan balance

Interest accrues daily based on your principal loan balance

How will I pay it back?

Minimum monthly payment required is $10 or 2.5% of the outstanding loan balance, whichever is greater

Minimum monthly payment required is $30 or 3.5% of the outstanding loan balance, whichever is greater; payments rounded up to the nearest dollar; minimum payments recalculate only when advances are made

Monthly payment is based on principal and interest rate until balance is paid off

 

Credit Cards

Credit cards are pretty easy to get nowadays and typically offer an option to take cash advances against your available credit. But before you apply, it’s best to understand how it works. Depending on your personal financial standing, a credit card company will approve you for a maximum credit limit, let’s say $2,500. In most cases, you would be allowed a cash advance for up to about 25% of your credit limit. In this example, that would be $625.

When it comes time to pay back the debt, the minimum monthly payment required is usually 2.5% of the outstanding balance or $10, whichever is greater. In this example, your first minimum monthly payment would be about $16. That seems like a pretty good deal, at first. Keep in mind, however, that you’ll also be paying interest on any balance you carry to the next month. Your interest rate can vary widely based on your credit score. Also, because interest is calculated using a fluctuating balance, your required monthly payment will vary as your charges change. This fluctuation can make it difficult to budget for.

The approval and delivery process is not as timely as other options. After you’re approved, it can take 7–10 business days to receive the card in the mail, so it’s not the best option for emergencies. But after your card is in hand and activated, you can take cash advances against it immediately.

Give us a call, or stop by your local financial center anytime to chat with a Personal Financial Representative and learn more.

Lines of Credit

A line of credit (also called a revolving credit line) provides access to some maximum borrowing amount, and is ideal for future purchases, especially when you’re not exactly sure how much you’ll need. A financial institution will approve you for a maximum line of credit. Once you’re approved, accessing the funds is quick and easy, and you have access to the entire amount at any time. You simply transfer the desired amount to your checking or savings account when you need it. This can be handy when an emergency pops up. Many people rely on lines of credit for overdraft protection or unexpected expenses.

When it comes time to pay back the debt, the minimum monthly payment required is usually 3.5% of the outstanding balance or $30, whichever is greater, and payments are rounded up to the nearest dollar. Minimum payments recalculate only when you transfer more money from the available line, so you can rely on a set minimum payment (until you borrow more money). For comparison purposes, let’s say you transferred $2,500 to your account from your line of credit. In this example, your monthly payment would be $88. This amount is more than with a credit card, but you could rely on the payment amount not to change. Here again, the interest rate varies depending on your credit score. Because there is no collateral on this type of loan, the rate tends to be higher than say, a car loan, but is fair.

The approval and delivery process is pretty quick and easy. Another advantage to lines of credit is that when you pay down the balance on your loan, you can access the available balance for future needs.

Personal Loans (or Signature Loans)

A personal loan is what you might expect. Imagine a good friend or family member lending you cash. They would generally give you a fixed amount of money in one lump sum. In general, the concept is the same: A financial institution gives you a lump sum, and you pay back the full amount over a fixed period of time at a fixed interest rate. Personal loans are useful for unexpected or larger expenses. Some people use personal loans to pay down, pay off, or consolidate debt (like other high-interest loans or debt).

When it comes time to pay back the debt, the monthly payment is based on the amount borrowed, the length of the term, and the interest rate. For example, if you borrowed $2,500 for a term of 36 months at an average interest rate of 15.9%*, your monthly payment would be about $88.

Personal loans are generally approved quickly, and the money is deposited directly into your checking or savings account. They offer the comfort of equal monthly payments and a scheduled final payment date at a fair rate, based on your credit score.


* For example purposes only. Interest rates are subject to change and vary based on individual credit scores.