Credit Cards vs Personal Loans: You should turn to institutional lenders if you have an immediate financial need, have no savings to draw from, and don’t want to borrow money from friends or relatives. Credit cards and personal loans are two of the most popular choices for the present age.
Understanding Personal Loans
An unsecured loan with no collateral requirements is called a personal loan. Obtaining one these days is rather simple if your credit score is decent. Conversely, credit cards provide you with a pre-approved credit limit that you can use whenever you’d like. In the event that you are short on cash due to unforeseen major repair or maintenance costs, uninsured medical bills, an emergency trip, a brief interruption in your income, etc., how would you decide between a credit card and a personal loan? Here are some considerations for your decision.
Credit Card Advantage in Urgencies
This relates to how much you really need the money. Credit cards are useful if you need to make a fast payment (for example, to purchase many tickets for a family member’s urgent flight). They can be used right away to purchase the tickets. You might not have the time to wait for a personal loan in such circumstances.
Credit Card Limit Consideration
This is crucial. You will need to apply for a personal loan if, for example, your credit card limit is only Rs. 2 lakh and your fund requirement is higher (about Rs. 3–4 lakh). However, utilising credit cards is preferable if your requirement is little and you are certain that you can pay it off in a month or two.
Interest Rate Comparison
Compared to credit cards, personal loans have substantially lower interest rates. The charges may vary according on your credit score, from 10 to 18 percent. Although these may seem excessive, keep in mind that credit cards often charge between 35 and 40 percent (or even higher). A credit card is OK if you just require a small amount and can repay it in full by the following due date. However, as credit cards charge 3–4% per month, it might get expensive if the required amount is significant and you know you won’t be able to pay it back in full by the credit card’s due date.
Importance of a Solid Credit Score:
It is in your best interest to make sure that you have a solid credit score in case you ever need to take out a personal loan. As it proves your creditworthiness to lenders, a high credit score might be useful. If you ever need a loan, having a high credit score not only qualifies you for a larger loan but also lowers your interest rate in comparison to someone with a low credit score.