What is best for you? Daily Journal

Published on: June 12, 2024

Imagine you need to cover an unexpected expense, perhaps a car repair or a medical bill. Should you use a personal loan or a credit card?

Both credit cards and personal loans provide a way to access money quickly, but they are not one-size-fits-all solutions. Let’s take a look at the difference between personal loans and credit cards to help you make the best financial decision for your situation.

What is a credit card?

Think of a credit card as a useful loan in your pocket. Issued by banks or financial institutions, this card allows you to borrow money up to a set limit for purchases or even cash advances. Unlike a debit card that deducts money directly from your bank account, a credit card gives you a credit line.

When you use a credit card to make a purchase, the credit card company pays the merchant on your behalf. This amount is then added to your outstanding balance. At the end of your billing cycle, you will receive a statement that includes all of your transactions, the total balance, the minimum payment due, and the due date. You can choose to pay the full balance, the minimum payment, or any amount in between. Paying the full balance by the due date can help you avoid interest charges.

Credit cards can be a convenient way to manage cash flow, establish a credit history, and earn rewards. However, they require disciplined use to avoid accumulating high-interest debt. Mismanaging credit cards can lead to financial hardship, including damaged credit scores and large debts due to compound interest.

What is a personal loan?

A Personal loan It is an unsecured loan offered by banks, credit unions, and online lenders. It allows individuals to borrow a lump sum of money to be repaid in fixed monthly installments over a specified period. Unlike secured loans, such as mortgages or car loans, personal loans do not require collateral, meaning they are backed only by the creditworthiness of the borrower.

When you apply for a personal loan, the lender evaluates your creditworthiness by checking your credit score, income, employment history, and other financial information. If approved, you will receive a lump sum of money, which you can use for various purposes, such as debt consolidation, home improvements, medical expenses, or other personal needs.

Once you have the funds, you start repaying the loan in fixed monthly installments over the agreed upon term. Each installment includes a portion of the loan principal (the amount borrowed) and interest. Since personal loans have fixed interest rates and repayment terms, you can be aware of your monthly payments in advance.

What is the difference between a credit card and a personal loan?

Choosing between a credit card and a personal loan depends on your financial situation and needs. Here’s a breakdown to help you decide:

feature	credit card	Personal loan
Credit type	Revolving credit	Installment loan
Use	Continuous access to credit for purchases, cash advances and balance transfers	A lump sum borrowed for specific purposes, such as debt consolidation or a large purchase
Payment	Flexible monthly payments, minimum payment required	Fixed monthly payments over a specified period
interest rate	High interest rates	Lower than credit card rates
Credit limit	A pre-determined limit, which can be increased with good credit behavior	A lump sum amount based on creditworthiness and lender policies
Guarantees	Not guaranteed, no collateral required	Not guaranteed (in most cases), no collateral required
expenses	Annual fees, late payment fees, cash advance fees, balance transfer fees	Processing fees, late payment fees, and prepayment penalties (depending on lender policies)
Accumulation of interest	Interest begins immediately on cash advances, and on purchases begins after a grace period if the balance is not paid in full	Fixed interest is calculated initially and included in the monthly payments.
benefits	Reward programs, cash back, travel points, purchase protection	Low interest rates, a fixed payment schedule, and predictable costs
Impact of credit score	It can affect your utilization rate, which is important for your credit score	Timely payments positively impact your credit score
Application process	Fast and often immediate approval	It may take longer, require more documentation and a comprehensive credit check, but is faster with digital lenders
better for	Regular and small purchases and those who can pay the balance monthly	Larger one-time expenses or high-interest debt consolidation
Grace period	Usually offers a grace period for new purchases	There is no grace period, and interest begins accruing immediately

Which is better, credit card or personal loan?

Choosing which is better, a credit card or a personal loan depends on your financial needs. Here’s a brief comparison to help you decide:

Situations where a credit card may be better:

• Perfect for regular expenses like groceries, gas, and dining out, with the flexibility of revolving credit.
• Offers flexibility with revolving credit, meaning you can borrow up to your credit limit repeatedly.
• It provides rewards such as cashback, travel points, and other perks.
• It comes with higher interest rates if balances are not paid in full each month.
• Easy access and convenience for everyday purchases.

Situations where a personal loan may be better:

• Suitable for larger one-time expenses such as home renovations, medical bills, or debt consolidation.
• It has lower interest rates compared to credit cards.
• Fixed payment terms with set monthly payments, making budgeting easier.
• Provides a lump sum advance with no revolving credit.

Considerations:

• Interest rates: Credit cards usually have higher rates, while personal loans usually offer lower rates for good credit.
• Discipline in repayment: Credit cards require more discipline to avoid debt, while personal loans have structured repayment plans.
• Fees and Charges: Credit cards can have fees such as annual fees, late payment fees, cash advance fees, and balance transfer fees, while personal loans may have processing fees, late payment fees, and prepayment penalties depending on the lender’s policies but are generally lower Costs.

A credit card is better for flexible spending on small expenses if you can pay off the balance monthly. A personal loan is most useful for large expenses or debt consolidation with predictable payments. You should evaluate your finances and ability to pay to make the best choice.

conclusion

In the debate between personal loans and credit cards, the better choice ultimately depends on your individual financial needs and circumstances. Credit cards offer flexibility and rewards for small, ongoing purchases, making them a convenient tool for those who can manage their spending and pay off balances instantly.

Personal loans, on the other hand, offer a structured repayment plan, often at low interest rates, and are ideal for larger one-time expenses or consolidating high-interest debt.

Personal loans can offer significant benefits to those looking to make large purchases or consolidate multiple debts. They have fixed monthly payments and predictable costs, which makes budgeting easier and helps you avoid the risks of high-interest credit card debt.

Additionally, with the rise of personal loan apps like LoanTap, access to funds is easier than ever. LoanTap’s personal loan app offers loans up to Rs. 10K and simplify the application process, providing fast approvals within hours at competitive prices, all through your smartphone.

Frequently asked questions

What is the main difference between a personal loan and a credit card?

A personal loan provides a lump sum of money that is repaid in fixed monthly installments over a specified period. The credit card offers a revolving line of credit that can be used for ongoing purchases and repaid by the due date each month.

Which typically have lower interest rates, personal loans, or credit cards?

Interest rates on personal loans are usually lower compared to credit cards, especially for borrowers with good credit.

Can I use the personal loan for any purpose?

Yes, personal loans can be used for a variety of purposes, including debt consolidation, home improvements, medical expenses, and other large purchases.

How do installments differ between personal loans and credit cards?

Personal loans have fixed monthly payments over a specified period, while credit cards require at least a minimum monthly payment, with interest accruing on the remaining balance.

Which is better for debt consolidation, a personal loan or a credit card?

A personal loan is generally better for debt consolidation due to its lower interest rates and fixed repayment schedule, which may make managing and paying off debt easier.