Credit card vs personal loan: Which one is better  for you?

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Whenever you have to make any big purchase or pay a bill or are planning any expenditure and don’t have cash, the best options you have are credit card or personal loans. However, choosing between the two is not easy. The choice between credit card vs personal loan depends on several factors and understanding the benefits and drawbacks of both.

Pros and cons of credit card and personal loan

Both credit card and personal loans give you access to quick money, but both have their own pros and cons. Before we detail which of the two best suits your situation, let us explain what both these terms mean.

A credit card is basically a revolving line of credit that you can use any time. Usually you need to make a minimum payment each month, but if you want, you can pay more or pay the credit card off completely. You will have to pay interest if you carry forward the balance.

Personal loans, on the other hand, are a fixed amount that you can borrow. You pay interest on the loan amount and pay it back in equal installments. The borrower has the option to pay back the loan amount before the end of the term.

Here are the the pros of credit cards:

  • If you already have a credit card with funds available, you can use it immediately.
  • Some cards offer low introductory rates.
  • They are widely accepted, thus allowing you to make a purchase almost anywhere.
  • Cardholders may also get rewards or benefits for using them.

These are the disadvantages of credit cards:

  • If you carry forward the balance, you may accumulate debt and incur high interest charges.
  • If you go for a low or no introductory offer and somehow fail to pay before the stipulated time, your interest could eventually get higher than it would be on a personal loan.

Now here are the benefits of personal loans:

  • Everything is on paper, including the upfront cost disclosures, fees and interest.
  • Since you pay a fixed monthly installment, it helps you plan your budget.
  • Interest rates charged on the personal loan are usually fixed.
  • You can pay the loan early without incurring any penalty.
  • You can easily pay off the personal loan if you make regular payments.

These are the disadvantages of personal loans:

  • Since loans have a set term, the minimum payment could be more than it would be on a credit card.
  • Some personal loans may charge hidden fees and a penalty for early payment, so learn the terms with your lender beforehand.

Credit card vs personal loan

Now that you know about credit cards and personal loans, let’s compare them on the same parameters:

Documentation – Taking out a personal loan requires you to submit several documents. Additionally, the whole process may take a few days. Credit cards, on the other hand, require fewer documents, and the processing is quick.

Interest – Personal loans usually carry an interest rate of 13% to 22%. On the other hand, credit card companies mostly charge an interest rate between 10-18%. However, credit card loans are usually at flat interest rates, meaning interest is charged on the initial amount borrowed, even if the amount decreases. Personal loans, on the other hand, are available with reducing balance rates, meaning the interest rate decreases with each decrease in the principal.

Tenure – Credit cards are for shorter terms, while personal loans are for long-duration loans.

Loan amount – If you are in need of a small amount, then a credit card is the better option. A personal loan is better if you need a bigger amount.

Credit card vs personal loan: how to choose?

We said above that choosing between a credit card vs a personal loan depends on several factors. These factors are:

How much do you need? – If you need quick but small funds, then a credit card is the best option for you. However, if you need a bigger amount (more than your credit card limit) then you should opt for a personal loan.

How long do you need funds for? – A personal loan is better for longer durations like a year or two. On the other hand, if you need credit for a few months, then it is better to use a credit card. You can also use a loan repayment calculator to compare the cost of each option.

How good is your credit score? – If you have a good credit score, then you may get a lower interest rate on a personal loan. A good score could also help you get a a0% introductory offer with a credit card.

Do you need cash? – You must know that credit card cash advances may come with additional fees. Personal loans, on the other hand, could give you cash easily.

Do you overspend? – If you have a habit of overspending, and you are not happy about it, then it is better to opt for a personal loan because you get a fixed amount. On the other hand, if you don’t mind overspending, then a credit card could give you that flexibility.

You should have realized by now that there is no one-size-fits-all when it comes to personal loans vs credit cards. To pick one, you must know exactly what you need and how much you need and then evaluate the best and right option for you.

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About the Author

Aman Jain
Aman is MBA (Finance) with an experience on both Marketing and Finance side. He has worked as a Risk Analyst for AIR Worldwide, and is currently leading VeRa FinServ, a Financial Research firm. Favorite pastimes include watching science fiction movies, reviewing tech gadgets, playing PC games and cricket. - Email him at amanjain@valuewalk.com

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