Personal Loans and credit cards are among the most common ways to borrow money. However, choosing between a Personal Loan and a credit card when an unforeseen need arises or you want to make a larger purchase can be challenging. While they can both assist you in achieving the same aim, they still operate in completely distinct ways. Let us understand the key differences between personal loans vs. credit cards or comparison between personal loans and credit cards in this topic.
Between the two, there are differences, and knowing whether to take out a Personal Loan vs. using your credit card can help you save money in the long run. For example, if you need a significant lump sum of money for a project or to pay off high-interest payments, a Personal Loan could be the way to go. A credit card is the best alternative to make a minor, routine transaction.
What is a Personal Loan?
A form of installment loan where the lender gives the borrower a lump sum of money to spend for a range of things, including home upgrades, automobile repairs, and debt consolidation, is termed a Personal Loan. It can also be use when in an emergency as well.
What is a Credit Card?
A credit card is a recurring source of financing that allows you to access money regularly. Rather than getting a lump sum of money, you can use your credit card to charge up to a specified limit.
The minimum monthly payback amount usually is about 2% of your outstanding total. For short-term financing, credit cards are best. Due to higher rates and the risk of holding a significant amount, you can pay off items in full, such as daily costs and monthly payments.
Key Differences between Personal Loans vs. Credit Cards
Here’s a detailed discussion of the differences between personal loans vs. credit cards so that one can compare them and then decide.
|Feature||Credit Card||Personal Loan|
|Application Process||Since the lender already holds your personal and financial information, these loans do not require further documentation.||To apply for a personal loan, you have to provide the lender with documentation such as your PAN number, proof of identification, signature proof, proof of residence, and bank statements from the last six months. Depending on the criteria of different banks, the paperwork may vary from salaried to self-employed persons.|
|Loan Amount||These loans are only appropriate if you need to borrow a small amount of money.||If a bigger loan amount is required, these loans should be preferred.|
|Loan duration||Credit cards have a shorter tenure.||Personal loans have a relatively long tenure for repayment.|
|Eligibility||Just the credit card holders are eligible for this type of loan.||Even non-customers of the bank are eligible for this type of loan.|
|Maximum loan amount||It depends on the pre-approved credit card limit set by the credit card issuer.||It is decided by the bank depending upon the borrower’s income and credit history.|
|Loan amount payment||The loan amount is directly transferred to the current/ savings account.||The lump-sum loan amount is paid to the current/ savings account of the applicant or via cash/cheque.|
|Additional expenses||Credit cards do not have any additional expenses apart from the interest charges.||The lender charges personal loan processing fees and other expenses, apart from the interest charges.|
|The time needed for approval||It is generally approved within 24 hours of the application when applied.||It is usually approved within 3-5 working days.|
|Repayment of the loan amount||It can be repaid in monthly payments, but an individual has a relatively shorter time for repaying the same and is paid before the due dates of the credit card bill.||It must be paid to the bank within the pre-approved period.|
Personal loans vs. credit cards can help achieve specific financial and lifestyle goals more quickly, but it should always be exercise with caution. Personal Loans are helpful when you require a long-term loan with set monthly payments and wish to be reimburse in a lump amount.
On the other hand, if someone wants a revolving line of credit that he/she may use again and again over a longer length of time, credit cards may be the ideal alternative. When selecting which is best, one should consider the low interest personal loans and the purpose of your loan. Whether choosing a Personal Loan or a credit card, be sure to have a repayment strategy. I
In general, one should only take on debt you can afford to repay. But if life intervenes and your capacity to repay your debt is affected, seeking specialized guidance from a financial adviser can help you regain control of the situation.