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Credit Card vs. Personal Loan

Credit Card vs. Personal Loan
By We Play Coins
Added on Dec 19, 2022

In the financial world, the prevailing piece of advice for professionals remains that the best alternative is to save. However, in reality it is not always possible to save with the expenses that face us. In such scenarios, people have to necessarily fall back on reliable means of financing like a personal loan or a credit card. Both these options provide one with financial assistance but when it comes to choosing, one must be picked over the other. To do so, it is important that you gain as much information on both these types of financing as possible.

For the financing of regular purchases and expenses, making use of a credit card or opting personal loan might be useful. However, both these options have some features unique to them and therefore depending on the features that appeal to you, you might choose the one that might align with your expenses and spendings. Credit cards represent revolving credit that can be used more than once but personal loans work as installment credit and therefore can be used just once. However, sticking to using credit cards over a personal loan can be better in the long run, depending on what the financial assistance is needed for.

Credit cards work as a short term form of debt while personal loans provide the borrowers with a longer period to repay the amount. In general, a loan is extended at a fixed interest rate and a personal loan is provided for a specified period of time. This can be paid by making equal monthly installments or EMIs with the total amount to be paid including the principal amount and the interest accrued. Personal loans may be sanctioned more easily for salaried professionals in comparison to self-employed individuals. Credit cards are known as revolving credit because the bill is raised on the monthly expenses and the credit limit provided depends on the frequent usage of the card and the repayment of the total balance at the end of the billing cycle.

When Should You Opt In For a Credit Card?

For individuals who are in need of finances for either small or big ticket purchases, credit cards can be a convenient mode of payment and one that can be used for offline and online purchases. Using a credit card for regular monthly purchases might have a greater advantage for users as the monthly bill raised can be repaid easily and within the given due date. This eases the full repayment of the total outstanding balance on the part of the credit card users. If the total balance owed is paid back within the due date every month, no interest is accrued on the amount spent using the credit card. Therefore, in this case, a credit card works like a short term loan that can be availed free of charge. In addition to this, credit cards also provide the users with rewards on different spends and purchases, thus giving the benefits without any interest.

Advantages of Using a Credit Card

The use of a credit card for regular monthly spends, a majority of which are fixed combined with responsible usage such that the balance is repaid within the due date at the end of each billing cycle, is one of the most potent means of organizing and dealing with monthly finances. This can also be a way to earn rewards and cashbacks for regular purchases made. Credit cards can come in handy as a backup in case unexpected expenses pop up and there is no emergency fund or savings to pay for these. These expenses can be accounted for immediately by swiping one’s credit card. There is no need for additional documentation while applying for a credit card and most people can apply for one if they have a good credit score and credit history.

Disadvantages of Using a Credit Card

Some credit cards may charge a higher interest rate depending on the type of card that you use and the APR for the particular credit card. Credit cards may also charge additional fees like annual fees, overlimit fees and late payment fees. Apart from this, credit card companies may set an eligibility criteria like minimum credit score for the applicants to be eligible for approval. Cash payments may also be a hassle in that credit cards charge Cash Advance Fees on cash withdrawal.

When Should You Opt In for a Personal Loan?

The large one-time purchases can be paid off by the users who choose to go for a personal loan. These expenses include home refurbishing or car repairs that can be paid off as a whole. The loan taken can be repaid depending on the convenience of the individuals. The eligibility criteria for availing personal loans is not as limiting as it is for some credit cards. Therefore, one can avail a personal loan if they want a longer time duration for the repayment of the amount borrowed. Apart from this, personal loans can be an easy way to finance multiple cash payments or for debt consolidation.

Advantages of Availing a Personal Loan

Personal loans usually provide credit at lower interest rates along with equal installments each month until the total amount has been paid off. Therefore, the individuals are aware of the amount to be repaid each month and can manage their budget accordingly around it. When you avail a personal loan, it can be used for a diverse range of uses except some finances like higher education. Personal loans can be easily approved by the lenders if the individual applying for it has a good credit score and credit history to their name.

Disadvantages of Availing a Personal Loan

The interest rate charged on personal loans happens to be 10.50% to 24% in addition to the processing charges which lie somewhere between 0.5% to 2.50%. This is slightly higher than the interest charged on credit cards. Personal loans have a fixed payment schedule each month while the credit card monthly payments are dependent on the purchases made. The interest rate on personal loans may be higher for people with a poor credit score or history and vice versa. The individuals need to submit additional documentation for securing personal loans.

Comparison Between Credit Card and Personal Loan

                                       Personal Loan                                                     Credit Card

     Lower interest rates than credit cards in general.

         Higher interest rates than personal loans in general.
           Amount for monthly repayment is fixed.  Amount for monthly repayment depends on the monthly                                  spendings and therefore changes.
     Interest rates vary depending on credit history.      Interest rate remains the same for everyone. Approval is                                dependent on credit score and history.
   Monthly installments and fixed monthly spendings                                            may be hard to adjust. Credit cards can be used for making fixed monthly spendings.
  Individuals are provided with a fixed amount of money      Individuals are provided with a line of credit to borrow from.
           Interest rate is charged for the sum borrowed     Users can enjoy interest free purchases if they pay the total                                          amount due each month.
           No additional benefits for the loan provided

Reward points on purchases under the rewards programmes for                                          different credit cards

Which is Better: Credit Card or Personal Loan?

To make the ultimate decision of choosing between applying for a credit card or availing a personal loan, there are a few considerations that should be kept in mind. If the credit is required for fixed monthly payments and spendings, the easy way out would be to get a credit card and make payments using it, thus raising a bill each month that can be repaid at once in full. If the amount borrowed can be repaid within a given period regularly, going for a credit card would be the better alternative. However, if the sum borrowed is large and therefore cannot be paid in full, one can choose a personal loan. With that being clarified, borrowing a sum that can take more than a few months to be paid back is not advisable in general. Apart from that, factors like requirements for casha and interest need to be included in deciding between choosing a credit card or a personal loan.