If you’re newly divorced, you may be experiencing a new struggle – being the sole income for your household.
But what happens when you find yourself faced with a large, unexpected purchase? You’ve finally signed the last paperwork, and everything is official, and just like that, you find out that you need to replace your roof. Figuring out your new household budget is one thing, coming up with funds for a major purchase is an entirely different challenge.
When you’re living on one income and adjusting to a new financial dynamic, you have two main options for these kinds of purchases: use credit cards, or obtain a personal loan. But if you need to get money quickly, you may not think too hard about either decision you make, which could land you in hot water in the long term.
When you need to raise funds to make a specific purchase, should you take out a personal loan or is it better to use credit cards? Ultimately, the answer depends on your finances, your history, and what you want for your future.
How To Get Money Fast
Whether you decide to open a new credit card or apply for a personal loan, you’ll need to prepare for the process by getting your relevant information together:
- Gather proof of income from your W2s or pay stubs.
- Collect any information on outstanding debts you already hold.
- Pull current account statements for any assets.
- You may also need to provide evidence of your divorce, and will want to ensure that any name changes have been recorded appropriately.
In most cases, you’ll be able to apply for either a personal loan or a credit card online, and you’ll typically have a decision within a couple of days. You don’t have to take the first acceptance you get – in fact, shopping around for different rates based on what lenders and issuers offer will help you save as much as possible.
If you decide on a card, you’ll get your account information quickly, and can go on to pay your bill. If you choose to take out a personal loan, you’ll sign the promissory note and funds will be transferred to your account.
It’s important to note that personal loans are structured differently than credit cards. With cards, you accumulate a balance and then make payments based on interest and your balance to pay off that amount. With personal loans, you get the agreed-upon amount upfront, and then pay a set amount over a fixed period to pay off both interest and principal.
Credit cards can also negatively affect your credit report, since FICO scores weigh revolving debt, like credit cards, when factoring in your total credit utilization. A personal loan, on the other hand, is an installment debt, which can help diversify the types of credit you hold, improving your score.
When it comes to using your money, like credit cards, a personal loan can be used to help pay for anything – like a new roof. But unlike cards, you’ll have a fixed interest rate, a set term of repayment (typically two to five years,) and agreed-upon payments going forward. Personal loans usually have much higher limits than credit cards, so with good credit, you can find offers up to $100,000.
However, some personal loans do come with origination fees or other additional costs that can add up, making it crucial to do your homework. Origination fees can be between one to five percent of the total loan amount, which can negate any savings at a lower rate.
Personal Loan vs. Credit Cards: Total Cost Breakdown
If you need ways to get money for a big purchase quickly, you’re probably going to go straight to your credit cards. After all, they’re designed to give you more purchase power, and you have them available to use right now.
However, if you have to replace your roof, you could be looking at between $5,000 to $25,000 depending on your location, needs, and home size. Let’s say your roof will cost $12,000 in replacement costs. If you put this amount on your credit card, you might not be able to pay much of it off; after all, after a divorce, you’re probably still trying to figure out how to pay your existing bills.
According to CreditCards.com’s weekly rate report, credit card interest rates at the end of February averaged 16.41%. Now let’s say you put that $12,000 for your new roof on a card with a 0 balance and a 16% interest rate. Your monthly minimum payments are around $280, which is within your budget. Each year, you’re paying approximately $3,300.
But in the long term, that roof will cost you nearly $18,000 because of interest payments, and you’ll be paying it off for over five years if you only make minimum payments. Of course, this also assumes that during that period you won’t add any additional debt to your credit card.
That being said, if you have excellent credit, you may be able to qualify for a new card with a 0% promotional rate for a period of six months to a year. Let’s say you are eligible for a 0% APR for 12 months – if you can pay $1,000 each month, your loan is paid off in one year with no interest payments.
When it comes to a personal loan, your credit score will be a major determinant of what kind of terms you can get. Some lenders offer personal loans to those with credit scores of 580-600, but these often come with APRs of 20-30%.
With your new roof, if you have excellent credit, let’s say you find a loan for $12,000 with an APR of 7%. You’re already set to save more than you would with a higher credit card APR, and your monthly payments will be under $240. Each year you’ll pay around $2,500, and your loan will be entirely paid off in five years at a cost of $14,200.
Personal Loan vs. Credit Cards: How Your Credit Matters
Your credit will be a major factor in your decision to go with using a credit card or a personal loan for a major purchase like a new roof. Before your divorce, you may not have focused on your score exclusively, but now it will be the single most important factor in finding ways to get money.
Based on the average scenario above, using a personal loan will save you thousands in total costs for a new roof. But what if you have bad credit? You may not have a high enough credit limit on your card to afford the entirety of the roof, or be able to qualify for a new card with a higher limit.
When it comes to loans, if you have poor credit, you could be saddled with a high-interest rate that seriously increases what the cost of that roof ends up being. Rather than the 7% loan for someone with high credit, you may only qualify for a personal loan upwards of 15%. A $12,000 loan with a 20% rate will mean monthly payments upwards of $317 and a total cost of $19,075 – with interest alone costing you a whopping $7,075. In that case, a credit card APR may actually be lower than that of a personal loan.
Personal Loan vs. Credit Cards: How To Decide
The structure of a credit card as a way to get money fast can be helpful in situations like emergencies, but the long-term cost to use this card may mean you’re paying more than you should. It may take a little longer to get a personal loan, but you could be rewarded with potentially better rates or lower payments.
When it comes to the question of using a personal loan vs. credit cards, there are some situations in which one is a better option than the other:
- Shorter-term needs: If you don’t need to replace your roof and you’re only looking at a few hundred or thousand dollars for repair, consider reworking your budget to pay for these costs in a month or two and use your credit card. New cards with promotional APRs can also help you finance repair or replacement without accumulating interest.
- Bigger costs: For a major purchase like a new roof, you may not have the credit limit on an existing card to pay in full, or you may end up using up too much of your credit and hurting your credit score. A personal loan, on the other hand, can cover the funds required to pay for your roof.
- Financial security: Are you the type to spend more than you should? The temptation of having a credit card – even one with a high balance – could mean a future of debt. If you want to know what your debt is at all times and to make sure you don’t unwittingly add to it, a personal loan can protect you from yourself.
Ultimately, it will be up to your finances when it comes to deciding between using a personal loan or credit cards for a major purchase like a new roof. If you can qualify for the lowest rates on loans, you’ll end up saving significantly – but if your credit score doesn’t get you those ideal rates, using a credit card responsibly and strategically could help keep your costs down.