Which is Better – Personal Loan or Credit Card?

When you require cash, you go for either a personal loan or a credit card. No matter what your choice is, both avenues will make cash accessible to you. What’s more, credit cards and personal loans offer a way to borrow funds and have many of the same standard credit provisions. They do not require any collateral, and the processing fee and interest rate are more or less similar in both sources. This puts you in a dilemma — Personal Loan or Credit Card. Which is better? To find out the answer, read the blog.

Before we go further, here’s what you need to know. First, what is a personal loan?

Personal Loan

A personal loan is provided by a lender, enabling you to borrow money at a specific interest rate and repayment tenure. The loan can be used for various reasons such as emergency expenses, weddings, buying a new gadget, etc. The lender sanctions the loan amount after assessing whether or not you meet the eligibility criteria along with other factors. You get a fixed amount and a specific time period to repay the loan in full through scheduled payments.

Benefits:

Some of the benefits of personal loans are:

• Eligibility criteria for personal loans are less stringent
• Looking to consolidate debt with a low-interest rate
• Quick disbursement and instant loan approval
• Attractive interest rate
• Flexible loan tenure
• Prepayment is allowed before the original tenure of the loan is completed

What is credit card?

Credit Card

A credit card is issued by a bank or financial institution that allows cardholders to borrow funds and pay for goods and services. Cardholders agree to repay the money, plus interest, according to the institution’s terms. The limit is decided by the card-issuing institution based on cardholder’s credit score and history.

Benefits:

The credit card offers the following benefits.

• The opportunity of building credit
• Earn cashback or miles points as a reward.
• Protection against credit card fraud
• Credit score information is available for free.
• There is no fee for international transactions.
• Increased buying power
• There is no connection between this account and a checking or savings account.

The Difference: Personal Loan vs. Credit Card

1. Purpose

A personal loan can be used for several purposes such as children’s education, wedding, medical expenses, etc. On the other hand, a credit card can be used for small and big purchases for business or personal needs.

2. Disbursement

The personal loan amount is paid as a lump sum to the customer. Conversely, customers can pay directly to the merchant on a card swipe via credit card.

3. Repayment

In a personal loan, a borrower has to pay EMIs to the lender for a specified tenure. On the other hand, in credit cards, payment is made by the cardholder at the end of the credit period.

4. Borrowing limit

The borrowing limit is calculated by the lender based on various factors. In contrast, the predetermined monthly credit limit is available on credit cards.

5. Documentation

A personal loan requires quite a several documents for approval and takes a few days to come through. But, the credit card does not need any documentation and is faster to attain.

Personal Loan or Credit Card: When to Use 

A personal loan is a good selection when you:

• Qualify for a low APR.
• Need to consolidate large, high-interest debts.
• Want to finance a considerable, one-time expense.
• Can make monthly payments over the loan term.

Whereas,

Credit cards are a good choice when you:

• Need to finance smaller expenses.
• Can pay off your balance in total per month.
• Qualify for a 0% promotional offer.

Personal Loan or Credit Card: How to Choose

If you are confused about which one is the best, then ask yourself the below-mentioned questions:

• How much money do you require? A credit card is a convenient choice since a smaller amount is typically easier to pay off (especially if you already have one with funds available).
• How long do you think it would take you to pay off your debt? A personal loan could save you money if the period is longer than a few months. Here, you can leverage the EMI calculator to help you figure out which route will save you the most.
• What is the state of your credit? You might be able to get a better deal on a personal loan if you have good credit, but you might also be eligible for a 0% promotional APR on a new credit card if you have good credit.
• Do you have a tendency to overspend? If you have a problem resisting temptation, a credit card can keep you in a cycle of debt.

The Bottom Line

Personal loans and credit cards are used when you need instant cash. Personal loans have lower interest rates than credit cards, but they must be paid back over a fixed time span. Credit cards give you constant access to money, and you only pay interest on balances that aren’t paid off on time. Therefore, it would be great if you take your time to learn about your options to help you save money and accomplish your financial goals in the long run. Besides, a lot depends on your need, perspective, and circumstance to determine a clear winner.