Is personal loan better or credit card? The answer actually depends on what you are buying and how you are going to pay it back?
When you are out to buy something big and you don’t have the necessary cash-in-hand, you are left with the only option of taking a loan. Now you want to swipe your credit card and take a credit card loan or go for a more traditional option of personal loan, that depends on your requirement and your situation. To choose between the two, you have to draw comparisons as both of them have their pros and cons.
The one that saves you money, in the long run, is the best financial solution for you.
A personal loan is a form of an unsecured loan and comes in a lump sum. You have a pre-determined amount of time to repay it. There is interest attached to it and on top that you may have to incur application fees, pre-payment fees, and even origination fees.
- Interest rates are lower than credit cards
- There is a fixed end date to the debt
- In the long term, it is cheaper
- You do not have the option to overspend
- You have the debt for minimum a year
- Repayment cannot be flexible
- The application is a long process
When is personal loan suitable?
- For making big purchases like a car or home renovation
- Borrowing a big amount for a long period of time
- Large debt consolidations
Credit Card Loan
Loan on credit card is the fastest form of unsecured credit. There is no need for documentation as it is a pre-approved loan. Theoretically, credit card loans can last a lifetime. There is a limit to how much you can borrow monthly and you have to make a minimum monthly payment. But you get rewards and facilities like balance transfer and grace period without interest.
- You get to spend money immediately
- There are rewards included
- It provides a constant cash flow
- No interest on the grace period
- The interest rates are usually higher
- Monthly payment needs only minimum amount which means the interest can accrue indefinitely
When is credit card loan suitable?
- When you want to make smaller purchases
- Debt consolidations are smaller
- For everyday shopping
Personal loan or credit card loan – which option is right for you?
There is a definite answer to this question. It changes according to the situation. But you can ask these questions to decide:
1) Why do you need the funds?
If you need a loan for a big one-time purchase like a car, then personal is the best option. But if you need constant access to credit like on a daily basis, then the credit card is the suitable option.
2) How will you repay?
As mentioned above, credit cards have an ongoing period while personal loans come with a particular end date. So if you think you are going to be tempted with the credit lines stretching indistinctively, you should go for a personal loan. Personal loans have a strict repayment schedule which has to be followed. If you are not disciplined with your payments, then the unstructured system of credit card loan can prove to be a fatal debt after some time.
3) What is your debt consolidation scene?
If you are consolidating debts, then you need to consider your options properly. You need to review how much debt you have and what is the ratio of personal loans and credit card loans. Make sure you are able to consolidate all your accounts. There are some providers which let you transfer the loan amount to credit card and vice versa.
4) How much you want to borrow?
The credit limit of credit cards is way different than that of personal loans. Personal loans let you borrow more amount of money. But credit cards have stricter eligibility criteria.
How to compare the two?
1) Interest rates
Generally, personal loans have lesser interest rates. Of course, before making the final decision you have to include other fees also.
Personal loans have application fees, origination fees and many other. But credit cards only have an annual fee, if at all. It depends upon your eligibility. High-end credit cards mostly don’t have any fees at all.
3) Financial condition
You need to consider your personal financial situation also. Are you disciplined in your spending and budgeting? If you regulate your spending, a credit card is good. But if you need structure to repay your debt, then a personal loan is better.
Personal loan as well as credit cards, both are good borrowing options. There are benefits to both and some drawbacks too. Many times people have used both together also for different purposes. Ultimately it’s up to you. You need to compare your options to make an informed decision.