When to use which and why

To finance current expenses, or even to pay off a debt, using a credit card or taking out a personal loan can help. However, each product has unique features that may work for you depending on your specific goals.

Here’s how the two compare to help you choose the best option.

Personal loans come with a variety of options within the category that can affect credit terms. The difference between a personal loan and a credit card is the long-term balance of a personal loan.

Personal loans do not provide continuous access to funds unlike a credit card but allow repayments over an extended period. The borrower of a personal loan receives a lump sum upfront and has a limited time to repay it in full, through scheduled payments. It can come with lower interest than credit cards for a good to high credit score.

Personal loans can be secured or unsecured loans that are not secured by collateral. It can offer funds to finance major purchases, consolidate credit card debt, repair or upgrade a home. Service charges and other fees may apply which add up. In case the loan is secured, then the assets are used as collateral and can be seized in case of default.

When to take out a personal loan?

Personal loans are generally best when you have large, one-time expenses such as car repairs or home improvement projects, among others. They can also be used to consolidate high-interest debt into a single loan with a lower interest rate. Personal loans can be useful if a longer repayment period is needed or if you need funds to make multiple cash payments or want tangible options for debt consolidation.

Credit cards fall into a class of borrowing called revolving credit. With a revolving credit account, the borrower has continuous access to funds. Credit cards come with a maximum limit, but users do not have access to a lump sum at a time. Revolving credit card accounts may also be eligible for regular credit limit increases. Interest is only paid on the funds used.

Credit cards can come in several varieties that provide convenience and benefits. The best credit cards may include 0% introductory interest periods, balance transfer availability, and rewards on every transaction. However, some cards may come with high annual interest rates combined with monthly or annual fees. Credit cards can be used anywhere electronic payments are accepted.

Credit cards can also be unsecured or secured. Unsecured cards offer unsecured credit while secured cards require borrowers to provide principal for the balance limit of the card.

Some credit cards offer the benefit of a statement cycle grace period. This allows users to borrow funds interest-free for 30 days if the balance is paid off before interest begins to accrue. Other credit cards charge daily interest and final interest is charged at the end of the month. Interest rates are generally higher than personal loans.

When to apply for a credit card?

Here are some cases where you should opt for a credit card:

  • For frequent small expenses that you can repay fairly quickly. It is recommended that you pay your bill in full before it is due.
  • If you can pay your balance in full within your designated billing cycle (45-50 days).
  • If you want the loan to be flexible by paying only the minimum amount due.
  • If you are in urgent need of funds you are sure to be able to repay easily in no time.
  • (Edited by : Shoma Bhattacharjee)

    First post: STI

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