Personal Loan vs. Credit Card: What to Choose?

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Personal loan is an unsecured loan that you can apply for to use it for just any purpose, debt consolidation, a vacation, and even for a horse. Apart from personal loans, there is also the option of using a credit card to get by during times of financial crisis. Between personal loans and credit cards, the wiser would be to choose according to the situation you are in or the requirement. In the case of cash from credit card, it should only be used for short-term financing. Especially on purchases that you will be able to pay off by the due date, like daily expenses and monthly bills. Using credit cards also has other benefits outside of free short-term financing. It comes in the forms of cash backs, travel rewards and other certain perks that you won’t be receiving with a personal loan of course.

With a personal loan, it is best used for long-term financing that includes things like expenses for starting a small business or consolidating credit card and other debts. The interest rate of personal loans compared to credit card is higher, making it anywhere between 13 to 22 percent. Comparably, a credit card stands at a nominal interest rate of 10 to 18 percent.

Let’s further delve into the pros and cons of each of the credit systems:

Personal Loan

Pros

  • Good for Budgeting – Once you qualify for a personal loan you can select the loan term and the monthly payment amount that fits well your budget. You can even pay ahead if you choose a loan option with no prepayment penalties.
  • No Impact on Credit Utilization –If your personal loan is listed as an “installment” loan rather than “revolving” credit, it will not be counted in your credit utilization ratio.

Cons

  • It will lower your credit score as applying for a personal loan will be counted as an inquiry into your credit. Avoid shopping for loans while applying for a loan at the same time. Instead enquire with lenders for the minimum credit score required.

Credit Card

Pros

  • It is fast and convenient to pay using credit cards. You can even get a low interest rate for good credit. Using a credit card with low introductory rate will allow you to pay low interest rates for several months. However, you will need a good credit score to qualify for a credit card with low interest rates.

Cons 

  • There apparently is the benefit of low interest rate but charging a big sum on your low interest card can seriously damage your credit score.
  • The rates on credit card are variable and the amount you are charged for maintaining a balance may change over time.

Credit card or a personal loan, the answer depends on the purpose of your investment or on what you are paying for; a single answer to this is not practical.  Only your fund requirements and initial recce on both the options will be able to tell you what to choose. We’ve surely given you our peace of mind!

Author: This article is written by Westbrook Julia. Julia would especially recommend personal loan for persons who aren’t able to pay off their balance in full monthly due to their interest rates typically better than credit cards. She also recommends those who’d consider using personal loans to consolidate credit card debt to first assess how long it will take them to pay off the debt.

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