You hunt for various sources of funds when an unexpected need occurs. You look for funds when you wish to make modest or large expenditures. Personal loans and credit cards are the two most widely used financial instruments that assist people during a crisis. However, deciding between two options can be difficult.
What is a Personal Loan?
A personal loan is a type of short-term financing that does not require collateral. You are free to put the money towards whatever you like. There are no limitations on how it can be used. Financial institutions evaluate your credit profile to determine the interest rate and loan amount. You can also apply for this loan using a loan app.
How does Personal Loan Work?
Personal loans are accessible to both salaried and self-employed. When you apply for this loan, the lender requires you to furnish KYC documents, income proof, and personal details. The lender evaluates the risk associated with your profile based on such paperwork. If the risk of default is high, your request will be denied.
If your loan request is approved and funds are disbursed, you must repay the portion of the loan plus interest every month.
What is a Credit Card?
A credit card is a type of financial product that comes with a pre-specified credit limit. The credit limit is based on your income and credit report. You can use the card to make payments towards numerous purchases. Some of them include restaurant bill payments, gadget purchases, and flight bookings.
How does Credit Card Work?
When you apply for a credit card, the lender sets a credit limit for you. You can spend the money on a variety of modest or large items. The lender sends you a bill every month. If you do not pay your bills on time, you will be charged a high-interest rate on the unpaid amount.
Personal Loan vs. Credit Card: Which is Better?
To get the answer to this question, it is crucial that we first know the difference between them.
| Parameters | Personal Loan | Credit Card |
| Repayment Tenure | You can choose the flexible term for the period ranging from 12 to 60 months. | You need to pay the minimum or the entire used limit on the due date of the month. |
| Interest Rate | Fixed interest rate, charged on the outstanding dues. | Variable interest rate, charged on unpaid dues. |
| Funds Disbursement | You get the entire loan amount at once. | Revolving line of credit. |
| Associated Fees | Processing fees, foreclosure charges, late fees, etc. | Annual maintenance charge, late fees, over-limit charges, etc. |
When to Use a Personal Loan?
Personal loans are ideal in the following situations.
1. Debt Consolidation:
If you have acquired a number of high-interest loans and are having problems repaying them, consider a personal loan. It can be used to pay off all of your high-interest debt at once.
2. Wedding Expenses:
When it comes to shopping for your wedding, personal loans are ideal. It can help you pay for your wedding dress, jewellery purchase, make multiple reservations, and so on.
3. Home Renovation
If you want to give your home interior an all-different look, consider applying for funds through a personal loan app. The loan is ideal for interior designing, construction, renovation, and other similar expenses.
4. Medical Emergency
If you fall short of funds at the time of paying for your medical bills, look no further. A personal loan can help you here. It can help in paying hospitalization bills, pharmacy bills, consultation charges, ambulance charges, and other similar expenses.
5. Higher Education
Personal loans come in handy when it comes to the high cost of education. It can help you in paying college fees, coaching fees, accommodation charges, and a few more.
When to Use a Credit Card?
Credit cards are ideal in the following situations.
1. Daily Purchase
Credit cards are a great way to pay for everyday expenses. You can use it to pay for groceries, internet and mobile phone bills, utility payments, and many other things.
2. Cash Back Offers
There are a number of stores and outlets that have financial institutions as partners. You may be provided with different appealing offers if you make a purchase from that particular shop. For example, if your lender has a tie-up with a particular petroleum company, you will be rewarded with cashback offers whenever you purchase fuel from that company’s fuel pump. Additionally, when you use your credit card to make a purchase during a festival, you can get a variety of discounts and cashback offers.
3. Planned Vacation
A credit card can make your vacation more enjoyable if you have planned your vacation ahead of time and have thoroughly analyzed your budget. It may be used to book hotels, make restaurant payments, and much more.
To Conclude
Personal loans have a slight advantage over credit cards. It can help you with both minor and large purchases, and it’s also the greatest option if you are in a financial emergency. However, credit cards, if not used wisely, can lead to a financial mess. It has the ability to harm your credit report as well. Furthermore, if you consistently exceed your monthly credit limit, you will be classified as a high-risk borrower.
