Signature Loans vs. Credit Cards – What You Need to Know

  1. What is a signature loan? – A signature loan is a type of personal loan that someone can receive without having to leverage their home or other personal assets as collateral. Sometimes called a “good faith loan,” a signature loan gets its name because all it takes is a person’s signature to secure it.
  2. How does it differ from using a credit card? – There are some definite similarities between signature loans and credit cards: both offer funds from a lender at a specified interest rate, require monthly payments that accrue interest, have penalties for late payments, set spending limits, and can affect your credit score. However, there are many key differences as well. For example, a signature loan is a lump sum amount that typically offers lower interest rates than a credit card. Credit cards, on the other hand, are a revolving form of credit that grants access to a certain amount of funds every month as long as payments are being made on time and the account is in good financial standing.
  3. What are some transactions you’d recommend putting on a credit card vs. getting a signature loan and vice versa? – Typically, signature loans are used for large-scale transactions that are too expensive to put on a high interest rate credit card. Things like medical emergencies, home repairs and alterations, debt consolidation, and even vacations can be paid for using signature loans. Credit cards, on the other hand, should be used for smaller-scale, everyday purchases. Many credit cards offer incentives like reward points or frequent flyer miles based on how much you spend on a credit card. While spending frivolously with a credit card is not a good idea, putting smaller purchases on a credit card and paying off your debts on time offer a good way to help build up your credit over time.
  4. What are the positives and negatives of both? – Positives of signature loans:
  • No collateral – Signature loans are unsecured loans, so they don’t require you to put down your car or home in order to acquire one
  • Lower interest rates than credit cards typically – A signature loan typically carries a lower interest rate than an average credit card interest rate. Some people even use a signature loan to pay off high-interest credit card balances for this reason.

Negatives of signature loans:

  • Fees and pre-payment penalties – Additional costs like late fees and pre-payment penalties have the potential to increase the total cost of signature loans.
  • Potentially higher interest rates than secured loans – Because signature loans don’t require a collateral, the interest rate is often higher than secured loans.

Positives of credit cards:

  • Rewards points and other perks – As touched on earlier, there are often incentives like rewards points that come with using a credit card that can benefit users in future transactions.
  • Ability to pay over time – While it’s a good idea to pay as much, if not all, of your credit card balance at every pay period to uphold strong credit, credit cards give users the option to pay off a small amount of the balance due over time.

Negatives of credit cards:

  • Growing debt – Your debt increases every time you use your credit card, as you’re opting to essentially pay in full for the purchase down the road. If you’re not careful, this can cause debt to slowly snowball and greatly affect your future financial situation.
  • Fees and interest rates – Like signature loans, not using a credit card responsibly can come at the expense of paying late fees and higher interest rates. This can add to the ever-growing debt that comes with using credit cards.

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