Credit Card vs Personal Loan: What You Should Choose?
When you need to borrow, you might consider going for a Personal Loan or a Credit Card depending on your financial requirement. While credit cards are ideal for short-term and small expenses, Personal Loan, on the other hand, is a good option for high ticket spends. The decision to go for either of them usually depends on the kind of requirement or emergency you have and the duration within which you will be able to repay it.
However, it is important to analyse your financial situation before taking the decision to go for these options.
How Credit Card Work?
When it comes to the transaction of a credit card, there are a number of things that happen behind the transaction scene. The credit card is one of the most expensive forms of financing as it comes with revolving debt. The basic rule of credit card is how much you end up spending every month and how much you are able to pay back on time. Since the interest rates of credit card are marginally higher, they are usually best used for short-term financing. You could use cash or debit cards for these same purchases but credit cards have a benefit outside of free short-term financing.
Many cards come with cash or travel rewards which can be beneficial to us a lot of times. You may spend and repay as much as you want as long as you abide by the Credit Issuers terms, e.g. make your payments on time and don’t spend more than your credit limit. You can keep borrowing against your credit limit over time, thus, credit cards are sometimes also referred as open-ended accounts.
To avoid the extra interest charges, you have to pay your full balance before the end of the grace period. However, the credit issuer usually doesn’t require you to pay back all of what you owe at once, but you must pay at least the set minimum payment by the due date to avoid a late penalty. Paying just the minimum is at times considered the slowest and most expensive way to pay off your credit card balance.
How Personal Loan work?
Personal Loans may be secured or unsecured loans and are best used for long-term financing. Before applying for a loan, you need to figure out what type of Personal loan you want. Your Credit Score plays an important part when it comes to the interest rate. Usually, the better your credit score, the more favourable your interest rates can be. Be sure to look for fixed-rate loans to ensure the interest rate you receive won’t change as you pay off the balance. Personal loans are more suitable for debt consolidation and have a maximum loan term. While Annual Fees is popular with credit cards, a personal loan can come with application fees or monthly fees.
Credit Card vs Personal Loan: Which is better?
There is no single answer to this. Each of our situations varies from one another. While a credit card might be a right choice in one situation, a personal loan might be more suitable in another and in the third situation, none of these might be appropriate.
You need to ask yourself some questions before opting for any of these two.
- Why do you need fund for:
If you need fund for a bigger purchase, then a personal loan may be suitable for you. If you want continued access to credit, then a credit card may be more suitable.
- How do you manage your repayments:
As we know credit cards are an ongoing form of credit, while personal loan comes with an end date. If either a personal loan or credit card will work for your needs, you may want to consider how disciplined you are with your expenses. If you think you may be more tempted with the credit line sitting there, then a more structured repayment schedule, such as that offered by a personal loan may be worth considering.
- It is important to consider your options extremely carefully:
How much debt you have and does it include loans and credit card accounts? Make sure you will be able to bring across all your accounts to consolidate in order to keep your finances on track.
How to Compare Personal Loan with Credit Cards?
- Interest Rates: If you compare interest rates, generally personal loans are cheaper. The true cost is reflected in the APR (Annual Percentage Rate), as you need to consider other fees as well.
- Fees: Personal Loan may come with an application or an origination fee, among other fee types. Credit Cards usually just have the annual fee, if there’s a fee at all.
- Your Financial Situation: If you have a good control over your spending and you regularly follow your budget, then a credit card could be suitable and even help you earn money through rewards and cash back. On the other hand, a personal loan offers the structure some people may need to repay debt timely.
|Features||Credit Cards||Personal Loans|
|Apply||You can either apply for one at Credit Card Store or Online||Personal Loans can be applied either at banks/financial institutions or online|
|Purpose||Can be used for small and big purchases||Mostly for bigger purchases like medical emergencies, higher education etc.|
|Mode of Repayment||Paid by the Customer at the end of the credit period||Paid through monthly EMIs to the financial institutions|
|Disbursement||Paid straight to the merchant on swiping the card||Full amount is given to the customer at once|
|Tenure||Depends on card to card and most usually offer tenure of lifetime||Ranges between one to five years|
|Borrowing Limit||Credit limit is predetermined||It is calculated by the financial institutions based on the income proof, credit history etc.|
|Interest Rate||Marginally higher than the personal loan in case of delayed and part payments||Depends on the kind of personal loan you want since interest rate varies from bank to bank|