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Personal Loan vs. Credit Cards Loan? Which One is Best

Personal Loan vs. Credit Cards Loan? Which One is Best

If you are in dire need of money but don't have savings and borrowing from family or friends isn't an option, you'll need to look for institutional lenders. Currently, the common options for borrowers in need of cash are credit cards and personal loans. They are both excellent choices when facing financial hurdles. But, they should not be used interchangeably and be chosen wisely depending on your needs. The best way is to compare personal loans vs credit cardloans based on your needs and situation.

At a glance, a personal loan is the sum of money a borrower gets in whole and pays it back within a specified period. A credit card is a type of revolving credit where a person borrows a certain amount of money depending on their spending limit then refills the limit through paying the balance. Let's say you are short on money for traveling, paying for medical, or unplanned repairs. You may apply for a credit card or a personal loan. But which one to choose? Read this guide till the end to learn the difference between personal loan and credit cardsto make the correct decision.

What is a Personal Loan?

It’s an installment loan you can borrow and pay back over time. Personal loans are mostly used to make large purchases. Whether it is home renovations, debt consolidation etc, a personal loan is the most perfect option. A personal loan offers fixed rates which implies that the monthly payments are as well fixed throughout the loan term. Therefore, a personal loan can be a better option if you need to borrow money at a low cost.

Personal loans have low interest rates that range between 6 percent to 36 percent depending on the lender and the credit score. Similarly, they have a clear repayment plan where you will be aware of the amount to be paid monthly and when to pay it. This will make it easy to budget or plan your finances properly. Moreover, it comes with a determined repayment schedule that can help you avoid overspending.

Pros & Cons of Personal Loans

Offers money for larger purchases.Includes service cost and may have other fees.
Provides lower rates than credit cards.No rewards.
Has fixed payments.No more credit after paying.
Provides money in lump sum. 

What is a Credit Card?

Revolving credit, such as a credit card, lets you borrow an amount not exceeding a specified limit. Credit cards are mainly for daily purchases like groceries. The interest rates for credit cards vary depending on the card's balance and the rate.

The main advantage of credit cards is convenience. You can conveniently make purchases online or in stores. Most credit cards provide rewards like points, cash back, etc, which will help you to save money, earn travel rewards etc. Apart from that, credit cards offer flexibility. You can make a minimum payment every month or repay the balance in full. But, paying the minimum amount is quite costly due to interest rate charges.

Pros & Cons of Credit Cards

Offers other benefits like 0% introductory rates & rewards.Higher interest than personal loans.
Ongoing revolving balance only charges interest when you use funds.Unpaid balances will lead to additional interest and fees.
Increase in credit limit for accounts with good financial standing.Doesn’t have a set repayment plan.

Differences Between Personal Loan and Credit Cards

While personal loans and credit cards are distinct, they have a couple of similarities. They are as follows:

  • A borrower needs to make monthly payments on time.
  • They are unsecured but not all.
  • During payments, you will need to repay the principal amount plus the interest accrued.
  • Both need credit check before approval.

Here are the main differences between personal loan and credit cards:

1. Type of Credit

A personal loan provides a lump sum of the cash you borrowed, while a credit card is a revolving credit. With personal loans, you borrow a certain amount of money and repay with an interest over a period of time. Revolving credit, such as a credit card, you will get a line of credit that you'll charge up and pay off. During repayment, you can repay the balance in full or make the minimum payment every month.

2. Interest Rate

Personal loans have a fixed rate, which cannot change during the loan term. Conversely, credit cards come at a variable rate that may change depending on various factors, such as market rate and if you're paying your bills on time.

Both credit options have an annual borrowing fee known as APR (Annual Percentage Rate). Normally, personal loans have lower APRs than credit cards, particularly for those with excellent credit.

3. Repayment Plan

Personal loans have a fixed payment schedule. After you take out a loan, you will know the monthly payments to pay. Sometimes, a personal loan is called an installment loan since you need to repay it in monthly installments.

As for the credit cards, the monthly payment will depend on the charged amount. The minimum payments may vary by the card issuer, but they are often between 2 percent to 5 percent of the outstanding balance. If you have a smaller balance, you can pay more than the minimum every month to save on interest and speed up the repayment schedule.

4. Fees

Personal loans and credit cards have different fees, which you need to go through them before signing.

Personal loans Fees:

Prepayment fee: It's a fee lender charge when you repay all or part of your loan early.

Origination fee: It is a one-time fee the lender subtracts from the top of the amount you're given to pay administration and processing charges. Normally, it ranges from 1% to 5%, but it can go as high as 10%.

Let's say the lender charges a 5% origination cost on a Rs.10,000 loan. You would need to borrow Rs. 10,500 to get Rs. 10,000.

Late fees: This is a type of fee you incur when you make late payments. Some lenders usually charge a percentage of the balance, while others will charge a fixed amount.

Credit Cards Fees:

Annual fees: It is the cost you pay each year that you are signed up for certain cards. Not all cards charge an annual fee, and some cards offering the best rewards may charge a high annual fee.

Late fees: Just like personal loans, credit cards also charge if you pay your debts late. In addition, you'll also be charged an APR penalty, which implies you will pay a high-interest rate.

Balance transfer cost: It's the cost of transferring credit card balances to different credit cards with the aim of taking advantage of the lower APR. The cost is 3 percent to 5 percent of the amount transferred to a new credit card issuer.

Over-limit fee: This is a fee charged when the balance on your card exceeds the limit. The creditor will deny your transaction if you spend more than the limit at a fee of Rs.35. If you do not opt for the approval of transactions, the card issuer will decline any purchase you make over the limit.

Personal Loan vs. Credit Card Loan: When to Use

Credit cards are a good option for making smaller daily purchases and settling small amounts. If you need to make a huge purchase, like consolidating debts or for education fees, a personal loan is the most suitable option. You can qualify for up to 2 lakhs personal loan, which is a good amount to handle those large projects you have in mind.

Take time to decide on the option that's better for you. Consider the payment terms and choose the choice that has more appealing terms. This will help you manage your funds effectively and enable you to handle your debt properly which in the long run helps save money.

Personal Loan Vs. Credit Card: How They Affect Credit

Both personal loan and credit card will affect your credit score either positively or negatively. Every time you apply for a loan, a hard inquiry is placed on your credit report which temporarily lowers your score by a few points. This hard pull will remain on the report for a few years but will not affect your credit score after one year. Paying the loan on time could improve the score since payment history accounts for about 35% of the credit score. Using the loan to consolidate higher interest debts will reduce the credit utilization ratio, which accounts for 30% of the credit score. This will in turn enhance the credit rating.

With a credit card, paying off the balances every month will help build your credit history, which may increase your score over time. But late payments will lower your credit. Keeping a higher balance on the credit card will lead to a higher credit utilization ratio which reduces the credit score. Therefore, make sure the credit utilization ratio is below 30%. If you have many lines of cards that have been open for years, it can raise your score, especially if you've been consistently maintaining the accounts and are in good standing.

Personal Loan Vs. Credit Card Loan: FAQs

Q1. Which is better: a personal loan or a credit card?

It depends on your needs. Both will come in handy when you need cash. A credit card is suitable for short-term debt, while a personal loan is suited for those who need time to make the payments.

Q2. When can personal loans be a better option than credit cards?

Personal loans come with a lower rate than credit cards and are a great option when you want to make huge purchases. If you do not plan to repay the balance for some time, then a loan will be a better option.

Q3. Will taking a loan affect my score?

Taking a loan will improve your credit score if you make timely repayments consistently. Late payments will damage the credit score when reported to the credit bureau.

In a Nutshell

Now that you know the basics of personal loan vs. credit card loans, making a choice shouldn’t be an issue. Both have boons and banes. Personal loans are the best option for those who want to borrow a lot of money but want to keep interest rates low. On the contrary, credit cards are convenient and flexible but may come at higher rates if you fail to repay the full balance every month. Before you choose between a personal loan and credit card loan, make sure you explore all options and compare the rates, fees, repayment schedule etc. But, the choice depends on your current needs and situations.

With lendingplate, you can get a personal loan at an affordable rate in minutes. With less documentation and faster approval, it is a good option to finance your needs.

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