Personal Loans vs Credit Cards: Know the Difference and Which is Better?

When looking for liquid funds, individuals can borrow a Personal Loan or swipe a credit card to cover the expense. Whichever avenue they choose, both options make cash accessible fairly instantly. However, one may need help deciding whether to go for the Personal Loan route or use a credit card. Ideally, a credit card is a better option for small, short-term, ongoing expenses that the cardholder can repay each month and borrow again when necessary. On the other hand, Personal Loans are more suitable for individuals who need a larger amount and a more extended period for repayment. Having said that, the decision basically boils down to understanding Personal Loans vs credit cards.

Whether an individual uses a credit card or takes a Personal Loan, the initial task is to determine the differences between the two.

What are Credit Cards?

Credit cards are plastic money people can use to make payments. They provide revolving credit, meaning the user spends money, pays it off in a bill, and repeats the cycle. The credit line remains open until the cardholder decides to close it.

When an individual applies for a credit card, the company issues a card with a fixed credit limit determined based on income, credit rating, repayment capacity, and other factors. The cardholder spends money up to that credit limit during a month. Then, they receive a bill to pay by the end of the billing cycle. Crossing the due date attracts hefty interest rates and late payment charges. Beyond interest, cardholders must be aware of a few other charges, including annual fees, cash advances, balance transfers, late payments, and foreign transaction fees.

What are Personal Loans?

A Personal Loan is a convenient funding option available for salaried professionals with minimum documentation needs and faster approvals without requiring collateral for security. Based on their needs, borrowers can apply for a Personal Loan online from top lending institutions like Clix Capital, which can provide instant funding to cover any unexpected expense without hassles.

On taking a Personal Loan, the borrowers receive a one-time lump sum amount, which they must repay in instalments over a pre-determined loan tenure. Since these are not revolving credit lines, the borrowers receive cash only once. Once paid off, they don’t receive any more credit unless they apply for another loan. Before applying, find out how much credit score is required for Personal Loan, based on which lending institutions decide the loan amount and interest rate.

Like credit cards, Personal Loan borrowers must repay the debt, in this case – EMIs. The EMIs consist of the principal and interest amount, gradually reducing as the loan term proceeds. The interest rates can be fixed or variable, depending on the lending institution’s policy, and the loan term may range from 12 to 48 months. Borrowers can select a loan term based on their monthly budget and repayment capacity. A longer loan term means smaller EMIs, while a shorter loan term means bigger EMIs.

Pros and Cons of Credit Cards

Credit cards have their set of advantages as follows:

  • One can use a credit card any time they need money without additional documentation or application procedures.
  • It provides a revolving credit limit that charges interest only when the cardholder uses the funds and does not repay them before the due date.
  • Individuals with good credit scores can enjoy introductory offers, lucrative rewards, and grace periods.
  • Regular bill payments attract credit limit increases from time to time.
  • Those with poor credit scores can build it up with regular payments over time.

With apparent positives, credit cards also have drawbacks that one must take into account:

  • Interest rates on credit cards are much higher than on other credit types, such as Personal Loans.
  • Cardholders must pay annual fees even if they don’t use the card.
  • Late payment charges and over-the-limit fees are hefty.
  • Cardholders can make most payments with a credit card. But if they need hard cash, the cash withdrawal charges are high and attract interest from Day 1.

Pros and Cons of Personal Loans

Let’s look at the benefits of borrowing a Personal Loan:

  • The Personal Loan eligibility criterion is less stringent than credit cards.
  • The interest rates are much lower than credit cards and other credit types.
  • A Personal Loan is ideal when an individual needs a lump sum amount to cover expenses.
  • Worried about how much credit score is required for a Personal Loan? It starts at 630 or above.
  • One may apply for a Personal Loan both online and offline. 
  • Once the lending institution verifies the applicant’s details and documents, they approve the loan instantly and disburse the funds quickly.
  • The repayment terms are flexible. Borrowers can choose a tenure ranging from 12-48 months.
  • Regular payments help build the credit score over time.

Although Personal Loans sound appealing, they come with their own set of challenges: 

  • Borrowers get a fixed payment schedule to repay the Personal Loan, which requires monthly payments. If you miss out on payments, you have to pay the penalty. This also affects your credit score.
  • The interest rates may be higher for individuals with low income, low credit scores, or high DTI ratios.

Choosing Between Personal Loans and Credit Cards

Understanding the Personal Loan vs credit card comparison and considering the pros and cons of both options, it is really up to the users to decide which credit type suits their monetary requirements. In most situations, credit cards are a better match for the following conditions: 

  • If the cardholders are sure they can pay off the bill within the billing cycle to avoid accruing interest
  • If the borrowers want to enjoy the flexibility of repaying only the minimum due amount in a month
  • If an individual needs urgent funds without application formalities

Depending on the financial situation, a Personal Loan can be a better way out under the following conditions:

  • If the borrower needs a more extended period to repay the borrowed amount
  • If a substantial lump sum amount is required to cover a big-ticket expense
  • If an individual needs funds to make multiple cash payments
  • If a tangible option is necessary for debt consolidation

From a broader perspective, both Personal Loans and credit cards seem similar. While the users borrow funds from a financial institution and make repayments to pay off the loan, the primary differentiators are mentioned above to help make a better decision. Personal loan vs credit card – which one is better? It is indeed a difficult call to make. It largely depends on the borrower’s financial need, perspective, and repayment capacity to decide the clear winner.

You may be interested in: How to Get the Funds You Need with a Low-Risk Personal Loan