Personal Loan vs Credit Cards – Which one to use?
When it comes to meeting an urgent expense, people have two options, either take a personal loan or use their credit card. It is important to consider your needs and circumstances. Both have their own sets of advantages and disadvantages, here how you can compare them to make an informed decision:
Borrowing Amount: Personal loans typically allow you to borrow a larger sum of money compared to credit cards. If you need a larger amount for a specific purpose, such as house renovation, debt consolidation or a major expense, a personal loan might be more suitable.
Interest Rates: Personal loans generally have lower interest rates than credit cards. This means that if you are able to avail a personal loan with a low interest, you may end up paying less in interest charges over time compared to paying a credit card periodically
Repayment Structure: Personal Loans come with a fixed repayment term, ranging from few months to several years. It helps you plan your monthly budget and allocate separate funds for EMI, so that it goes uninterrupted. The one advantage with credit card is that you can pay minimum amount due, however, you will attract interest charges for the same. A loan amortization would help you know what exactly the amount is pending in the loan
Access to Funds: Credit cards provide a revolving line of credit, allowing you to borrow and repay upto your credit limit. With credit card in hand, the access to funds is instant. You can swipe in a merchant outlet or use it online to purchase your desired things. On the other hand, personal loan takes time to reach your account. You need to apply for the loan, the lender scrutinizes your application, and then takes a call whether to approve or reject your loan.
Credit Impact: Both personal loans and credit cards can impact your credit score. Proper management and timely payments for either option can help build or improve your credit history. However, using the credit cards to their limits or missing payments can have a negative impact on your credit score. Personal loans, when repaid on time, can demonstrate responsible borrowing behavior and positively influence your credit score.
Fees and Additional Costs: Credit cards often come with various fees such as annual fees, balance transfer fees, and cash advance fees. Personal loans may have origination fees or prepayment penalties. It’s crucial to review and compare the fees associated with each option to understand the total cost of borrowing.
In summary, personal loans are generally better suited for larger expenses with a structured repayment plan and lower interest rates. Credit cards provide more flexibility for smaller ongoing expenses but tend to have higher interest rates. Consider your specific financial situation, borrowing needs, and repayment preferences to determine which option is more suitable for you. It’s always advisable to compare offers from multiple lenders or an online financial marketplace to find the best terms and conditions that meet your requirements