Credit cards and personal loans are both major financing options one could have but it is also important to determine when to choose one over the other because it could really make a difference in one’s finances.
Where credit cards can be good for short-term needs and convenience, personal loans really shine in more significant expenses or consolidating debt. Let’s get into when taking out a personal loan makes more sense compared to using a credit card.
1. Purchase Expensive Items
Why a Personal Loan?
Most people might think that personal loans are for small expenses. Well, it is not. These loans are better suited to purchase large ticket items such as renovations, bills incurred during medical treatments, or even weddings. They usually come with a higher borrowing limit than most credit cards and can also be paid back in installments structured over a given period.
Case in point: If you need that Rs. 15,000 for some serious expense, a personal loan would give you this amount at a very manageable repayment schedule, as opposed to a credit card that can carry very high interest rates and no timeline dictated for repayment.
2. Interest Rate Lower
Why a Personal Loan?
Personal loans usually have lower interest costs (6%-12%) in comparison to the average credit card (15%-25%). It helps to have some smaller rate difference to save cost in case of borrowing a large amount and making repayment for a while.
Example: borrowing Rs. 10,000 on a personal loan at 10% APR over 3 years may cost you much less in interest than would using a credit card at 18% APR with no structured repayment.
3. Debt Consolidation
Why a Personal Loan?
The best way to do this is to consolidate or put together several high-interest credit cards to a single lower-interest loan. This way, repayment becomes easier and, as time goes by, saves a lot of interest.
Take, for example, if you have incurred Rs 20,000 in debt on three different credit cards whose annual percentage rates (APR) average about 20%. You can save yourself thousands in interest by consolidating those credit cards into one personal loan with a 10% fixed rate.
4. Fixed Repayment Schedule
Why Do a Personal Loan?
Most personal loans pretty much come with fixed repayment schedules, so you know how much you need to pay each month and when the loan will be paid off. With credit cards, on the other hand, you just might keep on minimum payments and it can go indefinitely.
Example: In a personal loan, you pledge to pay off a Rs. 5,000 loan in 24 months, whereas credit card debt could exist for several years if only minimum payments are made.
5. No Temptation to Overspend
Why a Personal Loan?
You get an amount through a personal loan for the entire paying back the same. In credit cards, you normally have revolving credit that again makes you exceed your budget and ends up being more in debt to your credit card.
Example: Let’s say you get an Rs. 8,000 personal loan for a specific purpose. After that, your focus will be repaying that amount. The temptation of going over your limit could show up with that credit card because you might keep charging over your original need.
A personal loan can cover some unexpected expenses as they occur, generally beyond the limits of your credit card or very quickly in terms of cash transfer. They usually grant loans to customers within a time frame of 24 to 48 hours of applying for the loan.
Take, for example, a situation where it is suddenly discovered that you might be requiring a surgical operation in a hospital. An immediate personal loan of Rs. 12,000 will get the money much faster and with less cost than using up all the credit limits of the credit cards.
When Credit Cards Are Better?
While personal loans have their benefits, there are times when a credit card is a better option:
- Purchasing Small Stuff: Credit cards allow the small expenditure to be paid and often come with rewards or cashback.
- Short-term Loans: If you intend to pay back the amount before the close of the interest-free period, then credit cards can be less expensive.
- Improving Credit Score: Making regular responsible use of credit cards will help improve your credit score
Conclusion
The choice between a personal loan and a credit card depends on the size of the expense, the repayment ability, and interest rates involved. A personal loan is actually suitable when the expense is rather large or used to consolidate debts, where structured repayments can be produced. Credit cards, however, are for smaller, short-term needs or situations where rewards and convenience are important.
Pro Tip: Compare loan terms, fees, and interest rates before deciding. This is the way to save your money and maintain healthy finances!
Now, after knowing the basic differences between a credit card and a personal loan, you will be able to make the best decisions according to your needs.