Personal Loan vs. Credit Card: Which is the Better Option for Your Financial Needs?

When unexpected expenses come up, you might find yourself considering whether to use a personal loan or a credit card to cover the costs. Both options allow you to borrow money, but they work in different ways. Let's break down the key differences between personal loans and credit cards to help you decide which is better for your needs.

What Is a Personal Loan?

A personal loan is a type of loan that doesn't require you to provide any collateral, like a house or a car, to get approved. You can use it for many purposes, such as medical bills, vacations, or consolidating other debts. Personal loans are typically repaid in monthly installments over a set period, usually between one to five years.

What Is a Credit Card?

A credit card is a revolving line of credit. This means you have a limit on how much you can spend, and as you pay off what you've borrowed, that amount becomes available to use again. You can use a credit card for any type of emergency or meeting day-to-day expenses. The credit card company sends you a monthly statement showing how much you owe, and you can choose to pay the full amount or just a part of it.

Comparing Personal Loans and Credit Cards

Both personal loans and credit cards have their pros and cons. Here are some points that give you a clear picture of the differences between credit card and personal loans:

Eligibility

• Personal Loan: You can apply for a personal loan from any financial institution. Even if you're not a customer of the bank, you can still apply.
• Credit Card: You must already have a credit card to get a loan against it. Your credit card issuer decides how much you can borrow based on your credit limit.

How to Get Them

• Personal Loan: To get a personal loan, you'll need to apply to a bank or a loan app, providing documents like proof of income and identity.
• Credit Card: A credit card loan is usually pre-approved, meaning the bank offers it to you based on your existing credit card account.

Disbursement Time

• Personal Loan: It usually takes about 3-5 business days to get the money into your account.
• Credit Card: A credit card loan can be approved and disbursed within 24 hours.

Repayment Terms

• Personal Loan: You pay back the loan in fixed monthly payments over a period of one to five years.
• Credit Card: You pay back the borrowed amount through your monthly credit card bill. The repayment amount varies depending on how much you owe.

Interest Rates

• Personal Loan: Interest rates for personal loans generally start at around 10.50%, depending on your credit history and income.
• Credit Card: Credit card loans usually have higher interest rates than personal loans. The rate can vary depending on the bank and the customer.

Personal Loan vs. Credit Card: Which Is Better?

Deciding between a personal loan and a credit card depends on your specific needs and financial situation.

When to Use a Personal Loan

• Larger Expenses: If you need a significant amount of money, such as for home improvements or medical bills, a personal loan might be the better option. You can borrow a larger amount, and the repayment terms are often more flexible.
• Debt Consolidation: If you're looking to consolidate high-interest debt into one lower-interest loan, a personal loan could help you save money on interest over time.

When to Use a Credit Card

• Smaller, Everyday Expenses: If you need to cover smaller, everyday purchases, a credit card is convenient. Plus, many credit cards offer rewards like cashback or points for using them regularly.
• Emergency Funds: A credit card can be handy for emergencies when you need quick access to funds. However, it's essential to have a plan to pay off the balance quickly to avoid high interest charges.

Major Differences Between Personal Loans and Credit Cards

Here’s a gist of the main differences between these financial products:

• Interest Rates: Personal loans usually have lower interest rates than credit cards, making them more cost-effective for larger amounts.
• Repayment: Personal loans have fixed repayment terms, whereas credit card payments can vary based on your spending.
• Fees: Personal loans may have fees like origination or prepayment fees, while credit cards may have annual fees and late payment charges.

Conclusion

When choosing between a personal loan and a credit card you can take a look at the Bajaj Finserv Financial Products and it's crucial to assess your financial needs. If you need a large sum of money with a longer time to pay it back, a personal loan might be the better option. On the other hand, if you need funds for smaller, everyday purchases and can pay off the balance quickly, a credit card could be more suitable.