Nothing can beat cash payments when it comes to buying things you need and want. Paying in cash relieves you from worrying about interest charges and statements of accounts. That peace of mind is invaluable, knowing you don’t have dues coming in a few days. But no matter how ideal cash payments could seem, there will always be that time in your life when you run out of money, and you need a little help.

Financial emergencies are unexpected, and it is when personal loans and credit cards are a refuge to many. Credit cards provide the ease through simply swiping at physical stores and keying in your details online. On the other hand, personal loans keep the edge by offering cash with low-interest rates. We’ve elaborated on the pros and cons of personal loans and credit cards to let you decide which is better for your needs.

Similarities of personal loans and credit cards

1. Both are financial products offered by banks and other lending institutions

Credit cards and personal loans are available from banks, and just recently, from any lending institution. Home credit, for instance, is not a bank but is already providing both personal loan and credit card products to its consumers.

2. Both products are debts

Whether you want a credit card or a loan, the first idea is that you are borrowing money in different ways. You are practically borrowing cash from the lender which you need to pay within a certain period. 

3. Both require a good credit score

Your credit score is a basis for the approval of your credit card or loan application. High-risk borrowers can still be approved for a bank product but may be granted with high-interest rates and low loan amount or credit limit. Low-risk borrowers or those with high credit scores can enjoy seamless application and approval with even low rates and high loan amounts.

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Differences between personal loans and credit cards

1. Credit card is a revolving debt while a personal loan is a fixed debt

As a revolving line of credit, you can use your credit cards anytime you want as long as you have an available limit. You don’t need approval from banks because you need to make sure your available balance could cover your purchase amount.

Personal loans are fixed debts. You borrow a specific amount with specific interest rates paid at equal installments.

2. You might get stuck in debt with credit cards

Personal loans let you anticipate when the entire debt can be paid. You know that you should settle within a loan tenor that is from 6-36 months depending on your choice. With credit cards, you might get into the risk of borrowing without tracking; thus, your debts pile up without you knowing when all these could be settled. You can charge anytime and pay anytime. Sometimes, you are tempted to pay only the minimum amount each month such that you are not paying off your full balance.

3. Interest charges vary

Most credit cards charge around 3% interest on tops of unpaid balances each month. Personal loan interest rates usually come from 0.49% and above depending on the bank and type of loan. Since personal loans are unsecured loans, they may have higher interest charges over secured loans.

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4. Debt tenor

The duration of your debt differs in credit cards and personal loans. Credit card debts can last from 1 month to many years, depending on how soon can you pay them off. In personal loans, your debts are restricted to the loan tenor you chose during the application.

5. Fund availability

One of the most evident differences between a credit card and a personal loan is the availability of funds. As long as you have available credit, your cards can be an instant rescuer. You don’t need to wait for weeks for cash disbursement because you can withdraw cash from your credit cards immediately. Some personal loan applications can last for days or even weeks before your money reaches your nominated bank account.

When is personal loan better than credit cards?

Personal loans are better than credit cards in the following situations:

1. You want a lower interest

2. You want a fixed loan tenor

3. You want fixed repayment amounts

4. Your emergency need can wait a few weeks

Who doesn’t want to pay low-interest charges? In general, personal loans are way cheaper compared to credit cards in terms of costs. The idea of knowing the entire duration of the loan is also helpful to many because they can plan out their finances early on.

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When is a credit card better than a personal loan?

Choose credit cards over personal loans if:

1. You need to make small purchases

2. You want to pay off the debt at once

3. Your emergency can’t wait

4. You want to consolidate small debts from other credit cards

Final thoughts:

Credit cards and personal loans are useful financial tools if you know when and how to use them. It is better to understand all of your options before applying for one. Comparing will save you from risking your credit score. At present, compromising your credit score is as easy as getting hold of borrowed money from lenders. Better be careful with your choices and be responsible for them.

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GoBear team

GoBear team

GoBear Team - Our content creators collaborate to come up with finance articles that will make financial literacy a joy to learn and financial security an attainable goal.