Personal loans vs Credit Card: Know the difference

Several financial tools might assist you in meeting your immediate financial needs. And the two most common are credit cards and personal loans. If you are unsure which financial product to choose between these two, the following article will help.

What is a personal loan?

Personal loans are unsecured, collateral-free loans provided by financial organizations to meet your various financial demands. This loan's funds can be used for any legitimate purpose. The majority of borrowers use this loan to pay for a child's education, wedding expenses, home design, company expenses, and medical bills.

The personal loan interest rate and the loan amount are determined by your credit history. It means the lender considers your credit report, employment status, and experience, income, etc., before approving your application. They do this to determine your repayment capacity. In case your profile is approved, the cash will be credited to your account within 24-48 business hours.

When to use a personal loan?

There are numerous situations when applying for a personal loan is a wise move. A few of them are listed below. 

• If you fall short of a few sums during your child's admission to a higher degree program, you can apply for a personal loan to cover the difference.
• In the event of a medical emergency, you can use this loan to pay for ambulance fees, ICU charges, hospital room rent, diagnostic expenditures, and so on. Even if you have health insurance, there are some situations that your insurer will not cover. Personal loans rescue you in such situations.
• Personal loans are ideal for start-ups. Financial institutions do not lend business loans to entrepreneurs who have just started. The reason is a lack of business creditworthiness. However, based on your existing income source, you can qualify for a personal loan and use the funds for business purposes.
• Other reasons to use this loan include home renovation, traveling, car or two-wheeler purchase, 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 a variety of retailers, shopping malls, and grocery stores. The card issuer sets the card limit based on your creditworthiness or the volume of transactions you make with them.

Once you have the card and have made a purchase with it, you must refund the amount used within the time range specified. Repaying the debt on time will allow you to enjoy interest-free debt. However, in the event 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 are wondering when it is best to utilize it, we have got you covered.

• A credit card is ideal when you are on a trip abroad and want to pay for shopping or other small booking-related expenses. 
• If a medical emergency strikes, you can use your credit card to pay for small expenses such as pharmacy bills, doctor's consultation fees, and so on.
• A credit card is suitable for purchasing electrical gadgets such as smartphones, kitchen appliances, and household equipment like air conditioners.
• Using a credit card is useful when your card provider is offering large cash back bonus on specific purchases.
• If you have any reward points on your card, it is recommended that you use them while making a large purchase to receive a hefty discount.

Credit Card vs Personal Loan: Know the difference

1. Loan amount:

The loan offered under personal loan can go up to Rs 5 lakhs. Thus, personal loans are ideal if your needs are higher. 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 one disadvantage 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 entire amount. Personal loans are thus superior in terms of the loan amount.

2. Loan duration

Personal loans have a maximum repayment period of 60 months. Furthermore, the lender allows you to choose the duration that best fits your budget. Though, this is not the case with credit cards. The amount you used on your card had to be paid back within two months, if not sooner.

3. Interest rate

Personal loan interest rates are based on your creditworthiness. If you have solid repayment capability, the lender will approve lower-rate loans. Whereas; credit cards do not carry any interest charges if the dues are paid on time. But, in the event of default, the interest penalty can be around 36% per annum.

To conclude

Personal loans outperform credit cards in several ways. The former provides a higher loan amount, a longer repayment term, and a lower interest rate. The personal loan documents required are also kept at a minimum to make the borrowing process hassle-free. As a result, if your necessities are higher, turn to personal loans for immediate assistance.

(Devdiscourse's 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 does not claim any responsibility for the same.)