There is no black-and-white answer for whether you should opt for a personal loan or apply for a credit card. It entirely depends on where you would use the finances and how soon you will repay the credit facility. A credit card may be ideal in one situation whereas a personal loan may be useful in another.
Generally, credit cards come in handy for small and quick expenses, while a personal loan is a great option for larger expenditures. But before we get into the definition and differences between the two, ask yourself these three essential questions:
– Where will you use these funds?
– How will you structure your monthly repayments ?
– Do you have any other debt?
Definition of a Credit Card?
A credit card is a financial instrument that you can use for any point-of-sale (POS) and online transactions, apart from withdrawing money from ATMs. It comes with a credit limit that the bank authorizes based on a borrower’s earnings potential, credit score, repayment history, and the current sum of liabilities. Lenders usually give credit cards to customers having higher credit scores.
Just like a credit card, a personal loan is also a type of unsecured credit option given to a borrower without any collateral. It has a higher interest rate than home loans, car loans, or loans against property. To be eligible for a loan, you should either have a higher credit score or be a subprime customer willing to pay a higher interest rate.
What’s the difference anyway?
As highlighted earlier, you should be clear on the end utilization and urgency of funds to avail of a credit card or a personal loan. While both credit facilities offer repayment through EMIs, the difference lies in the interest rates.
Usually, the interest rate on credit card EMIs is slightly higher than on loans. Additionally, you can repay your entire credit card spending on or before the payment due date or convert them into EMIs.
Now if the financial requirement is small, you should discuss it with your bank or lender and opt for the best deal on your credit card. Use a personal loan when you need a large amount of money. Let’s understand this better with some real-life examples.
You can use your credit card for most online and offline transactions as long as you have great deals. For instance, if you want to purchase a home appliance that costs Rs 45,000, you can definitely use your credit card if it has a no-cost EMI option or offers discounts of 10%-15% on the purchase of home appliances. You do land up saving money on your purchase here. On the other hand, a personal loan is a costlier route here as you will need to service the loan with interest charges and processing fees.
A personal loan can be used for considerably large amounts of transactions, such as a home renovation or higher education. In the case of personal loans, the interest rate is lesser than what is levied on credit card EMIs in most scenarios. But other charges such as processing fees could be higher in personal loans.
Furthermore, if you are funding your requirement through personal loans, make sure to plan it well ahead of time as it can take at least 15 days for in-principal approval, the final disbursal, and credit into the bank account. While instant loans are quick to disburse, the option caters to small-ticket financial requirements and is exclusive to some customers having excellent credit scores and healthy repayment track records. Once activated, a credit card transfers payments to merchants directly in seconds.
When it comes to tenure, a credit card is usually offered for life. Whereas a personal loan is given for a period of one to five years. More so, credit cards come with annual fees, and personal loans have application or monthly fees.
You can use your loan to consolidate your credit card debt. And you can use your credit card to build your credit score. You do not need collateral or any financial obligation for credit cards and unsecured loans, but you would need collateral against secured loans.
The decision to apply for a credit card or personal loan depends on the kind of financial requirement you have. What also matters is the duration within which you can repay the entire credit.
For short-term and minor spending use your credit card. If you have a major expenditure planned in the pipeline, it is advisable to apply for a personal loan.