Personal Loan or Credit Card Which is Better

Introduction

When a sudden emergency comes your way, or you've been waiting to make a substantial purchase, choosing between a credit card or taking a personal loan can be challenging. There are distinct differences between the two, and knowing when to take on a personal loan or use your credit card can help you plan your finances down the road. 

Let's look at the key differences between a credit card and a personal loan to determine the right option for you.

What is a personal loan?

A personal loan provides you with a significant sum of money that you can typically use for debt consolidation or make a large purchase. To repay the personal loan, you need to make fixed monthly payments until the total amount is paid.

What is a credit card?

A credit card is a revolving credit line. That means you can keep borrowing funds repeatedly up to a set limit or the borrowing threshold, also referred to as a credit limit. To use a credit card to your financial advantage, you need to repay the statement balance or current balance every billing cycle.

Additional read: 5 Financial Planning Tips for Young Professionals

When to use personal loans

If you have budgeted to make monthly payments for the entire loan term, taking on a personal loan can be ideal. Here’s where a personal loan can come to use:

·  When consolidating debt.

Incorporating several high-interest debts into a single personal loan can benefit you with a low interest rate and better repayment terms and conditions.

·  Unexpected medical emergency.

While it is not advised to use a personal loan to pay medical expenses, in some rare cases, having a substantial sum of money that addresses sudden medical emergencies can be beneficial.

·  Home renovation/improvement.

If you are planning to refurbish or enhance your home, taking a personal loan can be beneficial. While there are better options in terms of a home improvement loan or home extension loan that you can add on to your existing home loan, in the event you do not have an existing home loan, a personal loan can come to your rescue.

·  Funding a wedding or a momentous occasion.

A personal loan is helpful when financing a meaningful event such as a wedding or paying for an international vacation. Since personal loan interest rates are lower than credit cards, you could save a reasonable sum of money in the long run.

Pros of a personal loan

• You can use a personal loan at your discretion for almost any reason.
• It allows you to combine small debts into a single personal loan and gives you the benefit of paying a single personal loan interest rate rather than multiple loan rates.
• It enables you to make fixed monthly payments consistently to budget your loan tenure appropriately.

Cons of a personal loan

• If you have a low credit score, you could face high-interest rates and additional fees.
• If you cannot repay the EMIs on time, you will be burdened with late fees and high interest that can make the personal loan more challenging to pay off.

Additional read: Why you can’t go wrong with the SIP method of investing

When to use a credit card

An essential factor to credit card usage is paying off the balance every month in full at the end of the billing cycle. Doing so can impact your financial health positively. However, if you are unable to pay the balance, it could accrue interest and result in clearing off the balance for a very long time.

Hence, you may want to be diligent and disciplined when using your credit card for purchases that you are sure you can reimburse on time.

Some common areas where you can use your credit card include:

·  Daily purchases.

Making everyday purchases that are easy to repay can help you raise your credit rating without endangering you in deeper debt.

·  Planned vacation.

If you hold a travel credit card, you could gather sufficient points to book a free flight or a hotel room. However, you need to have well-managed credit usage and plan your trip well in advance to take advantage of this feature.

·  Cash backs.

Some credit cards offer lucrative cashback benefits that you can use if you repay your balance in full.

Pros of a credit card

·  Earn bonuses and rewards.

Based on the credit card your own, you can receive cashback bonuses and rewards on your purchases.

·  Long-term advantages.

Making complete and timely payments on your credit card can be an excellent way of boosting your credit score. Important in determining your creditworthiness, your credit score can play a vital role in negotiating interest rates and getting approved for any form of a loan quickly.

·  Ease of use.

Paying with a credit card is far more convenient and accessible than pain through cash. Besides, even if you misplace your card, you can instantly block or freeze your credit card account to prevent fraud.

Cons of a credit card

·  High-interest rates.

Since interest rates depend upon your creditworthiness, you could end up with a high-interest rate if you have a low credit score.

·  Can raise debt levels.

If not utilized correctly, you could be stuck with debt from your credit card use that could become increasingly difficult to pay off in the long run.

·  Added fees.

Several fees come with a credit card. For instance, these include annual maintenance fees, late charges, foreign-exchange costs, return payment fees and more.

Additional read: The Ten Commandments of Effective Money Management In Your 20s

When used responsibly, your credit card can earn you rewards, benefits and cash backs. However, undisciplined usage can hamper your financial health.

Conclusion

When deciding between a personal loan or a credit card, you may want to evaluate how either of the two can impact your financial situation. Explore all options before deciding between the two. Once you've arrived at a decision, compare interest rates, terms and conditions, fees, and product structure. 

Look for prequalified personal loans and compare rates from various lenders when deciding to take a personal loan. When choosing a credit card, scan the fine print thoroughly to look for any hidden costs. Due diligence and extensive research on both products can help you determine whether a credit card or personal loan can meet your specific need.

Disclaimer

ICICI Securities Ltd.( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Centre, H. T. Parekh Marg, Churchgate, Mumbai - 400020, India, Tel No : 022 - 2288 2460, 022 - 2288 2470.  Please note, loans related services are not Exchange traded products and I-Sec is acting as a distributor to solicit these products. All disputes with respect to the distribution activity, would not have access to Exchange investor redressal forum or Arbitration mechanism. The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. Investments in securities market are subject to market risks, read all the related documents carefully before investing. The contents herein mentioned are solely for informational and educational purpose.