In today's economic landscape, as rising interest rates and inflation strain individual and family budgets, finding cost-effective ways to borrow money has become essential.
According to Lakhbir Lamba, PNC’s Head of Retail Lending, “Whether you need funds for home improvements, emergencies, or optional expenses like vacations and weddings, it's crucial to choose the right lending option that suits your budget and situation.”
Three popular borrowing options are personal loans, personal lines of credit, and credit cards. Each has its own uses, interest rates, flexibility of payment terms, qualifying process, and potential tax implications.
When evaluating these lending options, you need to determine whether there are origination or application fees or prepayment penalties. You should also calculate how the interest rate will affect monthly payments and how long it will take to pay back what you have borrowed. This information will help you determine how well the loan will fit within your budget.
Types of Loans and Their Uses
Personal loans are versatile and can be an excellent choice for one-time expenses, such as home improvement, vacations, weddings, large purchases, moving expenses, medical bills, or consolidating high-interest debt.
According to Harjas Sidhu, Head of Personal and Student Lending, “Personal loans provide a lump sum of money that you repay over a fixed term, usually with a fixed interest rate and fixed monthly payment, making budgeting straightforward.”
On the other hand, personal lines of credit are more suitable for ongoing expenses or situations when you may need to access to funds repeatedly over an extended period. They allow you to borrow up to a predetermined credit limit, but you pay interest only on the amount you borrow, and as you repay, the credit becomes available again. You can borrow and repay as needed, making minimum monthly payments, or paying more to reduce the outstanding balance more quickly.
However, lines of credit typically have variable interest rates, meaning the rate may fluctuate over time based on market conditions. If rates go up, you’ll pay more, but if rates go down, you could pay less.
Credit cards are similar to a line of credit but are better suited for smaller, short-term purchases and expenses. Credit cards provide flexibility in payment terms. You can choose to make minimum monthly payments, pay more than the minimum or pay the balance in full.
However, Lamba cautions, “It's essential to keep in mind that carrying a balance for an extended period can lead to accumulating high-interest charges. And interest rates may be variable, potentially exposing you to higher costs.
You may receive promotional offers that deliver zero interest for a specific period of time on your current credit card or a new one. That’s hard to beat, but if you don’t pay off your balance within the allotted time, the amount of interest specified by the lender will begin to be applied. These promotions are often used for transferring higher interest rate balances but can be applied to most types of purchases.
Tax Considerations
Questions about specific tax considerations for your situation are best addressed by your tax professional, but there are some general guidelines.
In most cases, the interest on personal loans and credit cards are not tax-deductible. However, if you use a personal loan for home improvements that increase the value of your property, you may be able to deduct the interest. Interest on a credit card for qualified business expenses may also be deductible.
Similarly, the tax deductibility of interest on lines of credit depends on the purpose of borrowing. If the funds are used for qualified expenses, such as home improvements or renovations, the interest may be tax-deductible.
Applying For The Loan
Generally, lenders approve candidates with a strong personal credit history, which includes repayment of bills in full and on time. Other factors they may evaluate include length of employment and income. These considerations can affect your likelihood to be approved and the interest rate for which you qualify as well.
Sidhu concludes, “Choosing the right lending option for your budget and situation requires careful consideration of your needs, repayment capabilities, and long-term financial goals. Each option offers its own advantages and considerations. Remember to consult with a financial advisor, loan specialist and/or your tax professional for personalized guidance based on your unique circumstances.”
It’s easy to obtain loan product information including current interest rates and apply for a personal loan or line of credit. You can also find credit card options, including rewards and rates with PNC Credit Cards.
