Many of you, at some point or the other in your life, have been in a situation where you are in urgent need to buy or spend on something but do not have sufficient funds. At such times, taking a loan is the most viable option and need of the hour and there are two options, either to use your credit or take a personal loan. While both credit cards and personal loans may look appear same as they both are a type of credit and you have to repay the principal amount with interest, but, in reality credit cards and personal loans are very different, even if they solve the same purpose of providing you funds.
Personal loan is a fixed debt in which you receive a pre-determined amount in lump sum which needs to be repaid in equal instalments every month over a specified period of time, with tenure ranging from 12 months to 60 months.
Credit card on the other hand is a revolving debt in which you have a credit limit set every month which you can use as and when you like and you can either pay off the entire amount at the end of each month or the minimum monthly payment and carry forward the balance to next month and continue to make new purchases by paying interest on your debt. So, in theory credit card debts can continue for a lifetime as long as you are making the minimum monthly payment. But that is a very bad loan because the interest is charged on the entire amount and not the outstanding amount alone. So, credit card debt is one of the most vicious cycles possible!
You must consider the following aspects before you decide to choose between a credit card and a personal loan:
Interest rate is the most important parameter before taking up any type of loan. The interest rate on a personal loan is much lower than that on a credit card. Depending upon your credit score and the lending institute the interest rate on personal loans can be anywhere is the range of 12% to 28%. Though credit cards come with interest free grace periods, the interest rate on the unpaid debt every month is very high and can be anywhere between 22% to 40%.
Maintaining a good credit score is very important for each one of us. Whenever you take a debt it shows in your credit history either as an instalment debt or revolving debt. This is another aspect where personal loan score over a credit. In case of a personal loan the debt is an instalment debt and timely repayment of EMIs every month makes you a disciplined with your finances and helps you improve your credit score. On the other hand, in case of a credit card which reflects as a revolving debt the utilization ratio is used to determine your credit score. Utilization ratio is the ratio between the credit available and used credit. The higher the ratio, the better it is for your credit score. But, if you constantly use your available credit each month and have a small amount of unused ratio, it hurts your credit score negatively.
Many of you use your credit cards because of the misconception that the processing of a personal loan is a tedious job, but in reality, applying for a personal loan is as convenient as applying for a new credit and the funds are available almost instantly and with minimum documentation.
Control over unnecessary expenditure
A personal loan helps you cover a specific cost as your access to funds is limited to the amount of loan granted. In this way you will only spend the exact amount without getting tempted to spend on unnecessary things. Credit card on the other hand gives you access to large credit limit every month and you can continue to spend each month by paying the minimum amount. This will not only increase frivolous spending but also increase your debt substantially over a period of time.
While the need to borrow can arise either unexpectedly or for a planned expenditure, it is always wise to weigh your options well. Credit cards are best suited for short-term expense which can be paid off easily in a month, choosing a personal loan is the best option to finance long-term expense, a big ticket purchase or even to consolidate high paying debts.