Personal loan vs credit card: Know the difference
Several financial tools can help you meet your immediate financial needs. And the two most common are credit cards and personal loans. If you don’t know which financial product to choose between these two, the following article will help you.
What is a personal loan?
Personal loans are unsecured and unsecured loans granted by financial organizations to meet your various financial demands. The funds from this loan can be used for legitimate purposes. The majority of borrowers use this loan to pay for a child’s education, wedding expenses, home design, business expenses, and medical bills.
The personal loan interest rate and loan amount are determined by your credit history. This means that the lender considers your credit report, employment status, experience, income, etc., before approving your application. They do this to determine your repayment capacity. If your profile is approved, the money will be credited to your account within 24-48 business hours.
When to use a personal loan?
There are many situations where applying for a personal loan is a wise decision. A few of them are listed below.
- If you are short of some money when you admit your child to a graduate program, you can apply for a personal loan to cover the difference.
- In case of a medical emergency, you can use this loan to pay for ambulance charges, intensive care charges, hospital room rent, diagnostic expenses, etc. Even if you have health insurance, there are certain situations that your insurer will not cover. Personal loans save you in such situations.
- Personal loans are ideal for start-ups. Financial institutions do not lend business loans to entrepreneurs who are just getting started. The reason is a lack of corporate solvency. However, depending on your current source of income, you may qualify for a personal loan and use the funds for business purposes.
- Other reasons to use this loan include home renovation, travel, buying a car or a two-wheeler, etc.
What is a credit card?
A credit card is a form of financial product issued by a financial institution with a predetermined credit limit. You can use this card to make cashless purchases at various retailers, malls, and grocery stores. The card issuer sets the card limit based on your creditworthiness or the volume of transactions you do with them.
Once you have the card and have made a purchase with it, you must repay the amount used within the specified time. Paying off debt on time will allow you to enjoy interest-free debt. However, in case of late payment, be prepared to pay a significant interest rate on the unpaid amount as a penalty.
When to use a credit card?
Credit cards, like personal loans, have no restrictions on their use. If you’re wondering when it’s best to use it, we’ve got you covered.
- A credit card is ideal when you are traveling abroad and want to pay for purchases or other small expenses related to the reservation.
- In case of a medical emergency, you can use your credit card to pay for small expenses such as pharmacy bills, doctor’s consultation fees, etc.
- A credit card is suitable for the purchase of electrical gadgets such as smartphones, kitchen appliances and household equipment such as air conditioners.
- Using a credit card is useful when your card provider offers a big cash back bonus on specific purchases.
- If you have reward points on your card, it is recommended that you use them on a large purchase to get a big discount.
Credit Card vs Personal Loan: Know the Difference
1. Loan amount:
The loan offered under the personal loan can be up to Rs 5 lakhs. Thus, personal loans are ideal if your needs are greater. On the other hand, the credit card limit is relatively lower compared to personal loans. A person with a good credit score can usually get a card with a limit of Rs 1 lakh. However, there is a downside to using a credit card. Even if your borrowing limit is Rs 1 lakh, your credit score suffers if you consume more than 30% of the total amount. Personal loans are therefore superior in terms of loan amount.
2. Duration of the loan
Personal loans have a maximum repayment term of 60 months. In addition, the lender allows you to choose the term that best suits your budget. However, this is not the case with credit cards. The amount you used on your card was supposed to be refunded within two months, if not sooner.
3. Interest rate
Personal loan interest rates are based on your creditworthiness. If you have a strong repayment capacity, the lender will approve low rate loans. Whereas; credit cards do not bear interest charges if dues are paid on time. But, in case of default, the interest penalty can be around 36% per annum.
Personal loans outperform credit cards in several ways. The former offers a higher loan amount, a longer repayment term and a lower interest rate. Required personal loan documents are also kept to a minimum to make the borrowing process hassle-free. Therefore, if your needs are greater, turn to personal loans for immediate help.
(Devdiscourse journalists were not involved in the production of this article. The facts and opinions appearing in the article do not reflect the views of Devdiscourse and Devdiscourse claims no responsibility for them.)