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  • Personal Loan Vs. Credit Card - Which One Should You Choose?

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  • When most people are in need of an immediate cash advances, their go-to option is usually either a credit card or a personal loan. While both sources offer the individual what he or she requires at the moment, there are a few instances where one option might be better suited than the other. Before we discuss which of the two options you should choose from, let us first learn how both of these lines of credit work.

    Credit card

    Credit cards are a type of loan granted by banks and come with a set limit. The customers can use the amount provided as per their choice and pay back the amount borrowed later. In this way, the amount that is loaned out to the cardholder can be used several times over. Credit cards are perhaps one of the most expensive forms of financing since the amount owed continues to circulate. Credit cards are ideal for short term financing.

    Personal loan

    A personal loan is a type of unsecured loan—the borrower is not required to put up any kind of assets as collateral for the loan. Personal loans are ideal for long-term financing and it has a fixed tenure that is chosen by the borrower. The repayment tenure for a personal loan usually ranges from 12 months to 60 months. The EMIs payable are inclusive of the interest charged.

    Choosing between a credit card and a personal loan

    The following are a few factors that can help determine whether you should choose a credit card or a personal loan for your finances:

    • Purpose of the loan
    • Before deciding which option would be better suited for you, it is important that you first evaluate the purpose of taking out the loan. As stated earlier, credit cards are better suited for short-term financing. For instance, if you are looking to buy a new appliance or a new gadget, a credit card might be the ideal option. However, if you are looking at a long-term financing option, such as renovating your home, a personal loan might be better suited for it.

    • Repayment capacity
    • Before choosing either option, you should evaluate whether or not you will be able to make the monthly payments as well as meet other financial commitments that you may have. Missed payments for both credit card bills and personal loan EMIs have a detrimental effect on one’s credit score and hinders any future prospects of obtaining a loan. As previously stated, EMIs for a personal loan are fixed based on the tenure of the loan and the amount borrowed. With credit card repayments, the amount due varies based on the amount the borrowed. With personal loans, the tenure can be chosen based on your capacity to honour the payment set based on your other expenses for the month.

    • Interest rates
    • The interest rates for both credit cards and personal loans vary based on a number of factors. While the interest rates for personal loans are a bit higher than credit cards, the interest is calculated based on reducing balance. With credit cards, the interest rate is fixed regardless of the balance that is owed.

    • Spending habits
    • If you are an impulsive spender, a credit card is not the ideal option since the amount on the card can be spent as and when you want. While personal loans also offer the same kind of freedom with spending, the amount is disbursed to the borrower in lump sum and requires some amount of planning in terms of how it should be spent. Furthermore, it is easier for borrowers to lose track of their expenses when they make impulsive purchases with their credit card which in turn results in a higher EMI. The fixed repayment schedule for personal loans deters any unexpected repayment.

    • Effect on credit score
    • Credit cards where more than 30% of the credit limit has been used is likely to have a negative impact on your credit score since the amount spent on a credit card is treated as revolving debt. With personal loans, on the other hand, the amount spent after the loan has been disbursed has little to no effect on your credit score. Missed payments of the monthly instalments, however, do negatively impact your credit score.

    • Amount required
    • The amount that can be borrowed via a personal loan is determined based on your monthly income. With credit cards, the credit limit offered is predetermined by the bank. If you require a higher loan amount, it is advisable to opt for a personal loan rather than a credit card.

    • Debt consolidation
    • One option that you can take advantage of with personal loans is that they can be used as a tool for debt consolidation. This cannot be done with a credit card.


    Identically, both credit card and personal loan serve the same purpose. So, whether you choose a credit card or a personal loan, it is essential to make the decision after taking into consideration all the factors mentioned above.

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