Your savings are not always enough. There are times when you need to borrow money to cover a few expenses, mainly larger purchases. Hence, you must choose the best financing option, and mostly the battle is between a personal loan vs a credit card.
These options give you a quick influx of money and have several similar attributes. Both have a specific interest rate, monthly payment of principal and interest amount, underwriting requirements, late fees, amount limits, etc. Moreover, mishandling either of them can damage your credit rating.
Despite sharing some similarities, personal loans and credit cards are quite different when it comes to repayment terms and other conditions.
What Is a Personal Loan?
You can take an instant personal loan for various reasons, including home improvement, debt consolidation, and emergency expenses. The process is pretty straightforward, you apply for a required amount, the lender checks your credit history to determine your eligibility and interest rate (the better your credit score, the lower the interest rate), once approved, you get the loan, and repay it in monthly instalments. You can get a secured and unsecured loan from a credit union, bank, or online lender.
Pros
- Lower interest rates and steady monthly payments
- A personal loan to pay off credit card debt can lower the credit utilization ratio, which can boost your credit score.
- If you need an urgent loan, then fast funding is best to raise a large sum quickly.
- Best for large purchases, such as home or car.
Cons
- Higher minimum payments than a credit card, which is difficult to manage for some people.
- Includes several fees, such as origination, upfront, and prepayment penalties.
- Lenders can seize collateral properties if failed to repay on time.
What Is a Credit Card Loan?
Credit cards are meant for frequent purchases as the borrower has instant access to the funds if his account is in good standing. Banks check credit card eligibility before granting one to borrowers. Once approved, they can take out a specified amount or up to the maximum limit. However, they don’t get the full amount and also pay interest on the funds they use.
Pros and Cons of Credit Cards
Pros
- Ongoing revolving credit charges interest when funds are used.
- Some credit card offers 0% introductory rates on new cards or balance transfers.
- The application process for a new credit card is simple and hassle-free with mobile and online accessibility.
Cons
- Variable interest rates can increase your monthly payments and interest cost.
- Interest is usually higher than personal loans.
- The temptation to use the card for daily purchases makes it hard to end the debt cycle.
Key Differences: Credit Card Vs. Personal Loan
| Personal Loan | Credit Card |
| It is an instalment loan where you receive money in a lump sum, and repay the amount in even monthly payments. | Includes revolving credit, so you can borrow money whenever needed and payments are based on the outstanding balance at a given time. |
| Fixed monthly payments | Variable minimum monthly payments |
| Pre-decided end date to pay off the debt | Debt cycle can continue if you use the card more often than paying off the debt |
| Used for larger purchases, such as cars and houses | Meant for frequent shopping and everyday expenses |
| Lower interest rates | Credit card charges higher interest rates but you won’t owe any if you pay the debt on time. |
Personal loan or credit card: How to choose?
To select the right financing option, you need to consider a few things:
- The amount you need to borrow. For a smaller sum, a credit card is a better choice.
- The time you need to pay off the debt. Prefer a personal loan if you need more than a month. Seek assistance from financial tips to repay the loan on time.
- Your line of credit and CIBIL score are also important factors. Excellent credit offers a lower interest rate on a personal loan but it also qualifies you for a 0% introductory APR on a new credit card.
- If you need cash, then a credit card may charge additional fees.
- With a credit card, you tend to spend frequently and more, which can keep you in a debt cycle forever.
Summing It Up
It is evident that not all loan options are the same. They have different structures, terms, benefits, restrictions, and other factors. Personal loans have lower interest but must be repaid within a set period. Credit cards provide ongoing access to funds with no interest but you have to pay off the debt on time. What option to choose would majorly depend on your credit score, it is critical to get credit approval and favorable terms.
Author Bio: Shiv Nanda is a financial analyst who currently lives in Bangalore (refusing to acknowledge the name change) and works with MoneyTap, India’s first app-based credit-line. Shiv is a true finance geek, and his friends love that. They always rely on him for advice on their investment choices, budgeting skills, personal financial matters and when they want to get a loan. He has made it his life’s mission to help and educate people on various financial topics, so email him your questions at shiv@freopay.com.