Credit Card v/s Personal Loan – The Right Choice to Make

Published August 4, 2018

Whenever someone needs to borrow, the first and foremost things that strike one’s mind are personal loans and credit cards. However; whereas a credit card seems ideal for a short-term debt that you might be able to pay off within a month or two, a personal loan seems legit for a long-term debt which would be paid off over a longer period of time. Let us try to understand in detail how both of these works and how to use them wisely.

How do Credit Cards work?

A credit card might act as one of the most expensing forms of financing, until and unless you acquire a good enough credit for a 0% offer. Whenever a payment is due on your credit card, you need to pay the minimum monthly payment to prevent any kind of additional interest on your balance amount. However, the debt that you can acquire from a debit card has a limit which is also dependant on the amount of money that you acquire and then repay on regular basis.

Due to the high-end interest rates, credit cards should be only reserved for short-term debts, which you are sure that you might be able to pay off by the end of the due date, similar to any other monthly bill. A lot of cards also offer cash or travel rewards, usually ranging from 1% – 3% of your expenditure which might act as a lucrative offer.

How do Personal Loans work?

A personal loan usually has a much lower interest rate as compared to a credit card. Unless a credit card debt, personal loans are to be repaid in a number of installments over a longer period of time. You receive a lump sum amount of money from the bank which is to be paid over a number of installment which might range anywhere from 2 years to 5 years or even more. The total amount to be paid in installments included both the principal amount and the interest.

Personal loan is best suited for long-term financing, which might include repaying a number of debts, opening up a business or even to support your other important personal needs. Personal loans have much lower interest rates than credit cards, so they are ones to go for if you have doubts about being able to pay back the full amount by the end of the month.

When to use a Credit Card?

  • Your purchase is within your credit limit
  • Online and in-store purchases
  • Non-eligibility for a personal loan
  • Guaranteed payback backup at the end of the month

When to use a Personal Loan?

  • A need for a higher amount than your credit card limit
  • Going out for a huge purchase that you would not be able to pay off within one go
  • Need to pay for something that does not accept credit cards

After understanding the basics of both the forms of financing, you must easily be able to choose from depending on your financial need and time frame required to pay the debt. Using them wisely might benefit your financial needs, however, exploiting them may lead you into highly induced debts.

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