All of us, at some point in time or the other face a cash crunch. And at these times, when we feel like there is no other way to get the money we so desperately need, there are only two options in our minds that feel the most secure. One is a credit card, and the other is a personal loan. But although a lot of us already know of what a credit card is, very few of us actually know of a personal loan.
While there are the obvious pros and cons of both these methods, it is important for us to be educated about both these options so that we can make the right decision, secure the amount we need, and don’t regret our decision later.
Thus in today’s blog post, we will discuss all personal loans and credit cards, and how in most cash crunch scenarios, a personal loan is a better knight in armor than your plastic buddy.
Let’s get started.
A Credit Card and a Personal Loan
Before we explore the nitty-gritty of why a personal loan is better suited to your needs than a credit card, let us first understand each of these terms clearly.
A credit card is a financial instrument that is provided by your bank, through which you can make purchases and withdraw money on a credit system and repay the bank at the end of the month when an invoice is raised.
While most credit cards in the market charge an interest amount on the total amount you spend every month, there are a few which are interest-free. One of the major USPs of a credit card is the wide access to rewards and loyalty points that you can get as a customer and can redeem at various outlets.
On the other hand, a personal loan can be defined as a loan issued by a bank, financial or non-financial institution, and the money from which can be used to meet personal needs such as paying off debt, paying credit card bills, solving cash crunch issues and many more.
One of the major differences between a credit card and a personal loan is the amount of interest they charge you, either on a quarterly or yearly basis. While at first glance, using a credit card might appeal more lucratively, given that you have access to a wide range of loyalty programs, rewards, and cashback’s, it is often not the scenario, since there is always more than meets the eye.
Advantages and Disadvantages of Using a Credit Card
While a credit card is definitely a very popular financial instrument used by thousands of people, there are some advantages and disadvantages associated with it, that you should be aware of.
- Easy Access: One of the first and most attractive advantages of using a credit card is the easy access it provides. Most banks have an online application form that allows you to apply for a credit card seamlessly from the comfort of your home.
- Introductory Offers: If you are a new borrower, most banks and financial institutions will offer you a very attractive introductory offer so that you choose their credit card over competitors, and this can range anything from no annual maintenance, all the way to interest-free credit cards.
- Cash Fees: One of the major disadvantages of using a credit card is the cash fees that are associated with it. A lot of people are not aware of this, but if you use a credit card to withdraw cash at any POS or ATM, you will be charged a hefty amount at the end of the month.
- Variable Rates of Interest: The second biggest disadvantage of using a credit card is the variable rate of interest it charges. In simple terms, this usually means that the amount you owe to the credit card will be the original amount on which you will be charged interest on a daily basis. For example, if you owe the credit card Rs. 5 today and the rate of interest is Rs. 2 every day, then at the end of today, your total due will be Rs. 7. Tomorrow, you will be charged another Rs. 2 interest on the new principal of Rs. 7, and your net due amount will become Rs. 9. So on and so forth, the amount of money you owe to the credit card company will severely increase on a daily basis, and thus it will impose a huge financial strain on you.
Advantages and Disadvantages of Using a Personal Loan
Now that you know the advantages and disadvantages of a credit card let us explore the same for personal loans.
- Fixed-Rate of Interest: One of the first advantages of a personal loan over a credit card is the fixed rate of interest it offers, on the same principal amount. While many credit cards in the market charge up to a 24 – 36% rate of interest per annum, personal loans typically charge between 10.99% to 24% depending on your credit score and other financial factors.
- Easier to Get: While it is mandatory to approach a bank and fill out an online application to get a credit card, added with the fact that it takes 4 to 5 business days to process the application, getting access to a personal loan is much easier. There are many applications in the market, which you can directly download either on your Android or iOS, apply for a loan in under 5 minutes and get the money straight to your account in less than 24 hours.
- Higher Payment: One of the most prominent disadvantages of a personal loan is the higher monthly installments you need to pay. Since a personal loan is usually for a lump sum amount and it needs to be paid back within a fixed period of time, the monthly installments generally tend to be heavy.
- Fees: While not all, there are definitely some personal loan applications in the market which charge you a percentage of the loan amount as a processing fee or withdrawal charges, and this, in some cases, might constitute a problem.
Ending Lines: Why a Personal Loan Is Better in Most Cases?
Now that you know the pros and cons of both credit cards and personal loans, it is evidently clear why a personal loan will be the best solution for your needs in most scenarios.
At the end of the day, it all comes down to one statement; if you need a lump sum amount which you want to pay back over a long period of time, then go for a personal loan from any of the best lending applications in the market. While, if you want some quick cash, like below Rs.1000, which you can pay back immediately, go for a credit card.
Author Bio: Surya Patra is a qualified webmaster by profession and Marathon Runner/Cyclist by passion with more than 6+ years of expertise in the financial domain. Surya is also an entrepreneur, enthusiastic in storytelling, content writing, and digital marketing professional.
HussaiN is a full-time professional blogger from India. He is passionate about content writing, Tech enthusiast & computer technologies. Apart from content writing on the internet, he likes reading various tech magazines and several other blogs on the internet.