Whenever you face financial difficulties due to emergency expenses, you can consider a personal loan or a credit card. Both are useful and reliable financial tools that can help in such situations. But how do you decide which option is best for you?
A personal loan provides you with a fixed amount upfront, which you can repay every month in the form of installments until your loan balance is completely exhausted. However, a credit card gives you a credit line, the balance of which is determined by your credit limit.
It may be challenging to decide between a personal loan and a credit card, as it depends on how and when you plan to use it. Before borrowing money, some important things have to be kept in mind, such as taking only the amount you need and whether you can repay it on time. All of this information must be kept in mind.
What is a personal loan or credit card?
Personal Loan
A personal loan is a loan of a fixed amount that is provided by a bank, credit union, or an online lender like Sofi. To qualify for this loan, you must meet specific eligibility criteria. After the loan is approved, you can use this money for your needs, such as home renovation, medical bills, or any other significant expense. You must repay this in monthly installments with interest.
Key Features of the Personal Loans:
- Fixed Loan Amount: You get a lump sum amount.
- Fixed Interest Rate: The interest rate of your loan is fixed.
- Fixed Monthly Payments: The EMI is the same every month.
- Loan Term: The repayment period in this loan is usually between 1 to 7 years.
Credit Card
A credit card is a type of payment card through which you can borrow money up to a fixed limit for your expenses. Additionally, you can repay it quickly. If you do not make the repayment or forget to do so, you will have to repay that amount along with interest.
Key Features of Credit Cards:
- Credit Limit: Your credit card has a limit on what you can spend.
- Revolving Credit: You can pay off your outstanding balance and use it again.
- Interest Rate: If you carry a balance, high interest charges are levied.
- Promotional Offers: Some credit cards offer 0% APR for a certain period on balance transfers.
Also Read: Types of Personal Loan Explained: A Complete Guide
loan vs. credit card
If you are looking for a loan for a large payment, you can opt for an instant personal loan, as it is ideal for significant expenses. It may take you some time to repay it, but it is a great option. A credit card is better for small expenses, as you can repay it quickly and at any time. Another advantage is that credit card interest rates are often lower compared to personal loan interest rates.
| Feature | Personal Loan | Credit Card |
| Loan Amount | Fixed amount | Credit limit |
| Interest Rate | Generally lower | Higher (unless 0% balance transfer) |
| Repayment | Fixed monthly EMIs | Flexible payments, but high interest |
| Best For | Large expenses, debt consolidation | Small, ongoing expenses |
| Credit Check | Yes | Yes |
What are the Pros and Cons of Personal Loans?
Here are some pros and cons you should know before applying for a personal loan with an affordable interest rate.
- Minimum Spend: Interest rates of personal loans are generally lower than credit cards (except 0% introductory APR cards). Maintain a good credit profile, as your exact interest rate is determined based on your credit history.
- Remove Temptation: Unlike credit cards, you cannot borrow money repeatedly from personal loans. If you make payments on time, you know in advance when you can repay your loan in full — and when you will become debt-free.
- No Repeating Borrowing: In a personal loan, you cannot borrow repeatedly, so you have control over your expenses.
- Prepayment Penalty: Some lenders may charge you a prepayment penalty if you pay your monthly payment early.
- Improve Your Credit Score: If you make timely personal loans and credit card payments, you will have a good credit score, which will make it easier for you to get a low-interest personal loan in the future. If you pay off your credit card balance with a personal loan, your credit utilization ratio decreases — which can boost your credit score. But remember not to close your credit card and avoid using it again.
- Interest Rate Benefits: The interest rate of personal loans is typically fixed, wherein you pay the same amount each month as an EMI within the loan tenure, but if you make a late payment or there is an extra fee, the overall cost may increase.
Read Also: How does a personal loan work
What are the Pros and Cons of Credit Cards?
- Flexible Payments: You can adjust your payments and even make minimum payments.
- 0% APR Offers: Some cards offer 0% APR for a certain period on balance transfers, giving you the opportunity for interest-free repayment.
- Rewards: Credit cards give you reward points or cashback, which you can use for your subsequent purchases..
- High Interest Rates: If you do not pay your credit card payment on time, the interest rate of your credit card can be charged, and you have to pay extra costs along with the payment.
- Credit Score Impact: If you fail to make regular payments or carry overdue balances, your credit score can fall, which can cause you trouble in borrowing loans and money in the future.
- Hidden Charges: Credit cards may carry hidden fees, such as annual fees and foreign transaction charges.
How to Choose: Personal Loan vs Credit Card?
Choose an Instant Personal Loan if:
- You need a large sum of money.
- You want your payments to be predictable and receive fixed monthly payments.
- You have a good credit score and want a low interest rate personal loan.
Choose a Credit Card if:
- You have small expenses that you can pay quickly.
- You are getting a balance transfer card with 0% APR and want short-term debt consolidation.
- You want flexibility about when you will repay.
Conclusion
If you need a fixed amount with structured repayment, the best personal loan could be a good choice and you can use this money for your Education Purpose such as a student loan depending on you. However, if you need flexibility and rewards for small expenses, a credit card option may be suitable. Both options have their benefits; it’s important to understand your financial situation before making a decision.