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Credit Cards vs. Lines of Credit vs. Personal Loans (What's the Difference?)

hey-ya I'm Jessica from prom on a comet

in this video we are to look at the

difference between credit cards lines of

credit and personal loans but before we

do that - you too please subscribe to

this YouTube channel if you have not

already and if you have already I thank

you for doing so so credit cards are

fairly easy to understand they're fairly

easy to get they're fairly easy to use

they give us rewards so that is the

reason why so many of us have them and

why I make so many videos about them now

when it comes to lines of credit and

personal loans honest those are not

nearly as popular partially because they

are harder to understand they are a

little harder to get and so we're not

quite sure you know how we would get our

hands on those or what they're really

good for when we already have credit

cards in our wallets right so in this

video I am going to talk about each of

them the credit cards the lines of

credit and the personal loans and kind

of tell you what the pros and cons are

of them and you know what the pros and

cons are as they relate to each other

and help you kind of understand you know

when you might actually use lines of

credit or a personal loan versus using

credit cards all right so let's start

with credit cards credit cards let you

buy on credit you can buy something

today and you don't have to pay for it

until later you just give the card and

they sort of take that as an IOU and

then you have to pay for it later so the

nice thing with credit cards is that

period between when you make the

purchase and when you have to pay off

the purchase is something known as the

grace period at least for most credit

cards and that means that in between

that time you are not paying any

interest on that purchase and as long as

you pay off that purchase on time you're

not going to pay any interest now when

you get a credit card the bank is going

to give you a credit limit meaning you

can buy things up to the amount so if

you get a credit limit of two thousand

dollars you could buy two thousand

dollars worth of things and not have to

pay them off until later now that all

sounds good but if you don't make those

payments on time you are gonna pay

interest at a very high interest rate

usually over 15% for a lot of people you

are going to pay over 20% on those

purchases if you do not pay them off by

the due date

now one of the nice features that many

people love about credit cards is

rewards you can get cash back on your

purchases you could get points toward

merchandise toward travel toward gift

cards all sorts of other things and

rewards are sort of a unique feature of

credit cards when we are comparing

credit cards two lines of credit and

personal loans now one of the other

things that people like about credit

cards is that relative to lines of

credit and personal loans they are

usually easier to get on an unsecured

basis meaning you didn't have to put up

any collateral in order to get them now

not all credit cards are super easy to

get I know there are plenty of people

out there that you know struggle

sometimes to be approved for credit

cards that they may want but when you

compare them to lines of credit or

personal loans credit cards are the

easiest kind to get on an unsecured

basis now what credit cards have a lot

going for them and they really are

intended to be used for specific

purchases that you make with that card

they're not intended to be a source of

cash or a source of cash flow yes you

can take a cash advance from your credit

cards but that is usually going to

include a fee it is going to mean that

you are going to pay interest

immediately upon doing so and pay

interest at an even higher interest rate

then your credit card already has so you

may be looking high in the 20s if you

take a cash advance so there's not

really the flexibility to use your

credit card as a source of cash whenever

you want it is really there for you to

make purchases with and lines of credit

and personal loans are more flexible in

that regard all right so let's talk

about lines of credit lines of credit

have a lot of similarities to credit

cards but there are some key differences

a line of credit oftentimes is going to

be for a greater amount in terms of the

limit of what you can access it is going

to have more flexibility in how you use

the money that we are talking about it

is going to have usually a lower

interest rate than a credit card would

have on the other hand if you access

your line of credit there is not going

to be a grace period you were going to

pay interest immediately and there are

no rewards on lines of credit so a line

of credit can essentially be thought of

as a pile of money that is sort of

sitting there waiting for you to use it

if the need arises so you sort of make

an agreement with the bank that you know

if you need some money

they will provide it to you if they you

know establish a limit for it so you

have a line of credit of a certain

amount and if you need it you can access

it so it sounds you know sort of how a

credit card works in the fact that there

is a limit and you know you use it when

you want to if you don't use it then you

know nothing is going to happen now the

difference between them is the fact that

usually with the line of credit you are

going to have a higher limit than with a

credit card and when you access that

line of credit it is actually going to

be money going from the bank into your

bank account

so instead of it being something where

you make the purchase and then you pay

it off you instead are accessing that

money it's being put into your account

and then you have a lot of leeway in

terms of how you actually use that money

a common use of lines of credit are for

home improvements people will take out

home equity lines of credit in order to

do improvements on their home because

they can get access to you know larger

amounts of money they can use it for a

lot of different things whether that's

paying contractors or it's buying

materials or whenever it gives them a

lot of flexibility in terms of how they

use that money and generally the

interest rate on a line of credit like I

said is going to be less than with a

credit card so say you were doing

something big like a kitchen renovation

or whatever and you needed access to

$25,000 well you don't want to be you

know making individual purchases that

you can't pay off right away

on a credit card that is going to charge

you know 15 20 25 percent where if you

have a line of credit at a lower

interest rate obviously that means you

can access more money and you would not

have to pay as much in interest in order

to pay that off again lines of credit

can be unsecured or secured secured

lines of credit are going to give you

lower interest rates than unsecured

lines of credit obviously if you're

putting down some collateral then the

bank has more reason to you know give

you a lower interest rate because if

something goes wrong they can take

something from you right so home equity

lines of credit

things that we often think about because

you are using the collateral the equity

in your home to back up the you know

line of credit that you are taking out

which means the bank has something they

could take from you if you don't pay it

back unsecured obviously they don't have

something they can take from you so

you're going to have higher interest

rates now one of the downsides for lines

of credit which keeps a lot of people

from using them is they're not super

easy to you know get your hands on

usually have to have an existing banking

relationship it's not as easy as just

jumping on the Capitol one website and

filling out an application and then they

send you a credit card right so you have

to sort of have a banking relationship

because the bank is going to be taking

money from their vaults sticking it into

your checking account when you access

that line of credit so there's a little

more work to set it up also like I said

before you are not going to have any

grace period so if you access your line

of credit you absolutely are going to

pay some amount of interest and you know

depending on how long it takes you to

pay it off you may pay more or less

interest and again like I said there are

no rewards with a line of credit versus

you know the rewards that you may be

able to get with credit cards finally

let's talk about personal loans which

are a different beast than credit cards

and lines of credit but may actually be

easier to understand because of the fact

that personal loans are simply

installment loans and so if you have any

understanding of how an auto loan works

for example then a personal loan is very

similar you have a set amount that you

take out as a loan and then you have to

pay it back in equal installments

generally over a certain period of time

at a certain interest rate so everything

is established upfront with a personal

loan how much you're taking out what the

interest rate is and what your monthly

payment is going to be all right so

let's say you take out a personal loan

for $5,000 it has a 36 month term it has

a 10% interest rate and so what ends up

happening is you pay maybe about 165

dollars a month for every single month

over that three year period those 36

months and then that $5,000

a loan would be paid off now in the end

you will have actually paid closer to

$6,000 so you will have paid about a

thousand dollars in interest but it will

have been a you know an installment loan

that you could count on in terms of

exactly how much you had to pay and

exactly how much interest you are going

to pay now one of the big differences

between a personal loan and a credit

card or a line of credit is the fact

that you have to pay you have to make

that payment every month you can't

decide to you know make a lesser payment

so if you had $165 you know a month

payment that you had to make you

couldn't say yeah well this time I'm

only gonna make you know make a payment

of $120 and just kind of let it ride and

I'll pay a little bit more interest you

are set to you know pay a certain amount

every month just like any other

installment loan now again with the

personal loan you've made a commitment

to that loan so you have said that you

are going to pay back that amount and

that you are going to pay interest is

guarantee you're going to pay interest

you've made a commitment to do so now

that makes it different than credit

cards or lines of credit credit cards or

lines of credit have the potential for

you to pay interest if you use them and

if you don't pay off the credit card or

you know if you access that line of

credit then you would pay interest but

those have the potential but if you

don't use them then you won't pay

interest on them where with the personal

loan again it's like an auto loan or any

other installment loan you have

committed to making payments and

interest being part of that payment so

it's guaranteed that you're going to pay

interest

now people take out personal loans for a

variety of reasons there is sort of in

the you know past history sort of a

negative connotation with personal loans

maybe because they tended to be more

loans for people that didn't have very

good credit payday loans are you know a

form of personal loan and so you know

that's how they were seen a lot of time

very high interest rates for people that

maybe you know really needed sort of

short term loans personal loans have

sort of been shined up a little bit I

guess over the past few years in

particular the bigger banks now are

offering personal loans and you know

people with

better credit are more likely to get

personal loans these days I think as

their brand or however you want to see

it has sort of improved personal loans

sometimes are taken out to you know pay

off higher interest debt and that is not

necessarily always from someone you know

that has a bad credit history so you

hear people talk about debt

consolidation loans which is just

another way of saying a personal loan in

order to pay off higher interest debt so

if you can get access to a personal loan

at you know a lower interest rate than

the you know 18:22 whatever percent that

you might be paying on one or more

credit cards then it would make sense to

take out a personal loan use that money

to pay off all of those higher interest

credit cards and then pay off the

personal loan then you don't have as

many things that you have to pay and you

have them all consolidated into one loan

that you can then pay off at that lower

interest rate again assuming that you

can get a personal loan at a lower

interest rate then the credit cards with

the higher interest rates which brings

me to my last two points and the first

one is that all of these instruments are

going to have interest rates that depend

to some extent on your credit history so

there's no guarantee that a line of

credit or a personal loan is going to

have a lower interest rate than a credit

card if your credit history is not very

good you may not be able to find a

personal loan or line of credit with any

better interest rate than the credit

cards that you already have now if you

have a better credit history that may be

different because credit card rates for

the most part are fairly lousy depent

you know regardless of what your credit

history is even people with good credit

history often times are getting you know

15% at best you know sometimes even over

20% on their credit cards but if your

credit history is better you could find

that line of credit or you could find

that personal loan that is going to

allow you you know to access money at a

lower rate and that's when obviously

those are going to you know come into

play and be a

idea for you and then the second point

that I would make and I didn't really

get into this too much because it's sort

of varies depending on who you're

dealing with and again with your credit

history but there may be fees attached

to opening lines of credit or

originating personal loans so you also

need to make sure that you understand

what all the different pieces are if you

go through and set up that line of

credit or you take out the personal loan

to make sure you're not only looking at

an interest rate but you're seeing what

all the you know rates and fees are

altogether so that is it if you have any

questions please put them in the

comments below if you are someone that

has used a line of credit or a personal

loan in particular and have anything to

add to what I've said I would love to

hear that in the comments too otherwise

thank you for watching in as always

please go to proud money.com where we do

credit card reviews and in personal

finance news and talk deals and all

sorts of other fun stuff too thanks for

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