Personal loans vs credit cards: Which is the best option?
When it comes to borrowing funds to cover expenses or consolidate debts, there are several true and tried ways at disposal. For most, the decision lies down on either personal loans vs. credit cards. The challenging part to know which one is most suitable.
Both personal loans and credit cards are ways of getting money quickly to fulfill your needs. However, each of them has its drawbacks and benefits. That is why you should weigh each to see the one that suits you. The only way to do so is to understand each of them.
What are personal loans?
For most of us, we are familiar with credit cards, but hardly know much about personal loans. A personal loan is a long-term source of funds, which you can get based on your needs.
These needs include home improvements, debt consolidation and emergency expenses, among others. There are several lenders of personal loans such as online lenders, credit unions and banks.
The loan requirements and terms for each lender are different from the other. Thus, each lender offers unsecured or secured personal loans. Either way, personal loans have a lower rate of interest than credit cards; specifically, if your credit scores are good.
At times personal loans are termed as “installment debts.” This means your money will come in a large amount and repay it in installments over a specific period – mostly 2-5 years. But this isn’t the case with credit cards.
Notably, your payments are inclusive of interests and principal. Unlike credit cards, personal loans are suitable for those unable to repay their balances in full every month.
- Lower rates of interests
- Doesn’t tempt to overspend
- Cheap in the long-run
- Repayment schedule indicates the debt has an end date
- might not be flexible (might not provide options to repay earlier than agreed)
- low repayment period, hence you’ll repay the loan for a long duration
- the application process takes long
- Huge debt consolidations
- Huge one-off purchases such as home improvement or cars
- Borrowing over an extended period
What are credit cards?
Credit cards could be an expensive way of financing. The interest rates are in two digits exclusive for those with good credit enough for a zero percent promotional offer.
When your payment date is due, your credit card service provider expects you to submit a minimum payment each month. In most cases, the payment rate ranges from 1 to 3 percent of the due balance. However, you will have to pay the balance off – in full. This will help you avoid accruing interest.
Interest is determined on the basis of average daily balance for that month instead of the end balance.
Credit card holders are limited to the amount of debt they should have on their cards. In such a case, your available balance will depend on your spending and repayment rate.
Unlike personal loans, you do not need collateral to get a credit card. Hence, you can get credit card any time, but be aware of high-interest rates. Credit cards are suitable for short-term financing such as purchases, monthly bills and daily expenses. Either way, just ensure that you are in a position to pay off when the date is due.
- Instant spending of funds
- At times comes with rewards
- Convenient alternative for those in need of frequent cash flow
- Zero interest grace period
- Balance transfer for loan consolidation
- Higher interest rates than personal loans
- Requires minimum repayments for every statement period, hence our debt will accrue interests indefinitely
- Small purchases
- Little debt consolidations
- Daily retail purchases or shopping, with reward points once spent
- Spending amount payable back in the zero-interest introductory duration
Notable differences between the two
- Personal loan credit cardInterest rate Mostly 2.99% to 36.00% Mostly 13.99% to 22.99%
- Borrowing limit $100,000 $50,000
- Repayment terms Monthly Monthly
- Loans payout a lump-sum when approved
- Revolving credit on card
The bottom line
Personal loans vs. credit cards: which is best for you? This is a question that lingers in many people’s minds. The fact of the matter is that the right one depends on your needs. Likewise, it depends on your capability to repay the principal and interests within the due date.