Introduction
Most borrowers often get confused about whether to go for a personal loan or a credit card. The choice between these two depends on your financial requirement. Credit cards are best for small repeated expenses. Personal loans are a good option for big spending. Choosing between these two majorly depends on the individual requirements or emergencies. You should also factor in the duration within which you will be able to comfortably repay these borrowings. If you are contemplating borrowing either a personal loan or making a credit card application, here is some information that can help you make the decision on when to opt for either of these. You can also check derogatory marks.
How do credit cards work?
A credit card may be handy for making instant transactions; however, it is also one of the most expensive financing tools since it comes with revolving debt. The main premise of credit cards is how much is spent through the card every month and how much is paid back on time. Since the interest rates charged on a credit card are generally higher, they are best used for short-term financing needs. It is advisable to use cash or debit cards for similar purchases.
Many credit cards offer cash or travel rewards that can benefit users many times. You could spend and repay as per the credit card issuers terms. Making timely payments and not overspending are two golden rules that can benefit credit card users. You can also borrow against your credit limit when needed.
To avoid additional interest charges, you must make sure to pay the full balance before the due date. While credit card issuers may not require you to pay the entire due amount, you must at least make the minimum payment within the due date. This way, you can avoid a late penalty.
How does a personal loan work?
Personal loans are generally unsecured loans and help in meeting long-term financing requirements. Before making a loan application, you need to understand the type of personal loan you require. Your credit score is an important determining factor as far as the applicable interest rate is concerned. The higher the credit score, the more favourable interest rates will be. Therefore, ensure to opt for a fixed-rate loan so that you can pay off the balance without facing an interest rate increase.
Credit Card vs Personal Loan: Which is better?
There is no one answer to this question. Each individual may have different financial situations to deal with. While a credit card can be ideal for one situation, a personal loan may not suit the same and could be better for dealing with another situation. Neither credit card nor personal loans may work in certain kinds of financial situations.
Therefore, while choosing between the two, you must ask yourself the below-mentioned questions:
- Why do I require the funds?
If you are in need of funds for making a big-ticket expense, a personal loan may be an ideal choice for you. If you require continued access to credit, a credit card can prove to be more beneficial.
- How do I plan to manage the repayments?
Credit cards are ongoing credit while personal loans have an end date. If a personal loan or credit card can suffice for your needs, you should check how disciplined you can be with your spending and repayment. If you will be unable to manage your spending due to the continuous availability of credit, you can go for a personal loan since it will limit your spending horizon and restrict it to certain key needs.
- What is the current state of my debts and finances?
How much debt do you owe? Does it include loans or credit cards? How much have you repaid out of the total debt owed? Make sure to have answers to these questions before applying for a credit card or a personal loan. Consider an option that does not overburden your debt account and create further obligations which you may not be able to meet.
How to compare personal loans with credit cards?
Here are a few comparison points that can help you choose between personal loans and credit cards:
- Interest Rates: While comparing interest rates, you can observe that personal loans are often cheaper. The true cost of personal loans is reflected in the APR (Annual Percentage Rate) since you also need to take into account other fees.
- Fees: Personal loans could charge an application or origination fee on top of other fees. Credit cards come with an annual fee and joining fee, depending on the issuer.
- Financial situation: If you can manage your spending and are regularly following a budget, a credit card may be ideal and even allow you to earn money by way of rewards and cashback offers. On the other hand, a personal loan comes with a structure that allows people to make a timely debt repayment.
EndNote
Always compare the pros and cons of a personal loan against a credit card before making a selection between the two. If you time your application well, you will be in a better position to manage your personal loan or credit card debt obligation with ease.
