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Understanding Installment Loans and Credit Card Interest Rates

Sometimes we all need to make a purchase that requires us to borrow money or rely on credit. These can be larger investments, like starting up a new business or purchasing a new home. Or they can be smaller amounts for things such as an unexpected car repair bill. Regardless of the size of the loan, as long as you understand how interest rates work, you can make your borrowing decisions with peace of mind and avoid the trap of paying too much.

Installment loans and credit cards are both ways to borrow money and can have similar terms. But they do have some distinct differences, advantages, and disadvantages.

Understanding Credit Card Interest Rates

A credit card offers ongoing access to money at the time of purchase. With a credit card, you have a limit or maximum amount of available funds to access (i.e. a credit limit), and you do not have to take all of the money at once. Credit cards offer more convenience and flexibility, but higher interest rates than investment loans.

Most credit card lenders calculate your interest payment based on a daily rate, taking the annual rate and dividing it by 365. This is called the daily periodic interest rate. Lenders then apply that to your daily credit card balance to come up with an interest fee at the end of each monthly billing cycle if you carry a balance and are not paying off your card every month.

The good news is you don’t have to pay interest on a credit card if you pay it off each month. Interest is only charged on the amount you owe at the end of each month, so it is possible to still use credit cards for large purchases AND avoid interest fees if you pay off your balance each month. If you don’t, you will incur an interest payment on your balance owed.

If you can pay your balance off monthly and avoid costly interest rates, using a credit card can have advantages, such as earning airline miles, cashback, or reward points if your card offers reward benefits. It’s also a great way to demonstrate a consistent repayment ability, which will also help your credit score.

Understanding Installment Loan Interest Rates

An installment loan offers an upfront lump sum of money with an understanding that you’ll pay it back over a period of time, typically with monthly payments. Unlike using a credit card, this loan provides a set amount of funds, and is best for large projects, like remodeling a home or consolidating debt. Using a personal loan at a competitive interest rate can help you pay off debt, such as high-interest credit card debt, faster.

The rate you secure on an installment loan depends on the loan amount, your credit score, and other factors. Installment loans may have origination and late payment fees you should consider. With a good credit and banking history, you may be able to secure an installment loan with an APR (annual percentage rate) well below the average credit card interest rate.

Whether you're looking to fund a major project or purchase or hoping to reduce and consolidate debt, we’re here to help. At Citizens Bank, we can secure you the loan that’s right for you, and the best possible interest rate. To get started with an application, call (317) 831-0110 or find a branch near you.

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