Personal loans or Credit cards: What’s my choice?

It is a common debate: Should I take a personal loan or reach out for my credit card? Probably, you too may have indulged in water-cooler discussions on this topic with your colleagues. You will find that both these financial products have their own advantages and disadvantages. Let’s observe how they fare against some common metrics that determine the decision of borrowers. 

1) Processing time

Imagine you are working at your desk like usual, and you get a phone call. WHAM! Bad news: you need Rs 1 lakh at immediate notice. You don’t have that much money lying around. If you have a friend or relative offering help, that would be great. Problem solved. Good luck mixing business with pleasure- we’ve heard that never goes wrong!

Personal loans or Credit cards

Otherwise, it may be a good option to use your credit card. The processing time for a credit card loan is very little. Just dial the customer care number of your credit card and put in your request for a loan. Provided that the loan amount is within your credit limit, it will be credited to your account within 24-48 hours. If you need to pay immediately for medical expenses that are not covered by your insurance, this option can prove to be helpful.

Though you can avail a personal loan for such situations, the total time taken to process the loan is much greater. First, you need to submit the necessary documents like your payslips, Form 16, KYC documents, etc. You get the money only after the bank verifies all the documents and finds that you are eligible for the loan. The entire process can take a week. 

2) Loan amount

Credit cards come in handy if you are in need of short-term financing. It is best employed to cover small purchases like daily expenses or monthly bills. Of course, you can use cash or debit card for such transactions but when you use a credit card, you get benefits such as travel rewards. Further, using a credit card to purchase stuff is similar to cash purchases. The interest payment is zero as long as you cover your payments within thirty days of the purchase.

But if you require a larger amount, it is better to opt for a personal loan. You can utilize a personal loan to fulfil any of your financial goals. In fact, you can even start a new business venture with a personal loan. 

3) Rate of interest

The interest rate on a credit card is always going to be much greater than a personal loan. The interest rate for a personal loan peaks around 20%. But for credit cards, you will find that rates can even shoot up to 50%. Remember, in the case of credit cards or personal loans, your credibility and credit score can determine your interest rate. Borrowers who have a good credit history usually avail loans at a better rate. Sometimes, the lender may grant you a loan even if your credit score is poor. But the interest rate for the loan will be much higher.

4) Time period for repayment 

There are a lot of credit card debt-trap stories. But did you ever hear one that revolved around a personal loan debt? Personal loans are instalment loans. This means that the lender gives you a lump sum and you make regular payments over a specific time period until the debt is repaid. It is usually between two to five years. Credit card debt, on the other hand, is revolving. This means that you don’t have a specific date to close your debt. It all depends on how much you spend and repay every month. And if your spending habits are not in control, the payments can go on for a long time.

Bottom line:

In the end, which is better: credit card or personal loan? Unfortunately, there is no single solution to fit each and every situation. Both of these products were designed to serve specific purposes. However, it is best to opt for a credit card loan only in the most extreme circumstances thanks to high interest rates. If you are faced with a situation where you need fast cash and without the hassles of documentation, then go for a credit card loan. Otherwise, it is best to fulfil your goals through personal loans.

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