Pros and Cons of Personal Loans vs. Credit Cards

Mar 01, 2017

There are numerous types of financing available in the market of which credit cards and consumer loans are the popular ones. Quite often, individuals who wish to avail of credit get confused between these two options. Choosing the right mode depends on your financial needs and how you intend to pay it back.

About personal loans

A loan borrowed to fund personal financial needs like further education, wedding, medical expenses, or any other emergency is known as a personal loan. Such loans are repaid along with a certain interest over a period of time known as loan tenure. The loan eligibility of an applicant depends on various factors like age, current income, repayment history, and his credit score.

What are credit cards?

A credit card, also known as 'plastic money', is a mode of payment through which the cardholder may make purchases on credit. These cards are generally used for short-term financing. Cardholders have to repay the amount used along with a certain interest during their next monthly payment cycle.

Personal loans vs. credit cards

Here are four differences between personal loans and credit cards

  1. Flexibility
    Credit cards offer a greater degree of flexibility than loans. You may make payments through your card whenever the need arises. However, the same is not applicable in the case of loans. Loans are very structured, as you have to borrow a specific amount and make repayments over an agreed period of time.
  2. Interest
    A huge advantage of a credit card over loans is that the former charges zero interest. Every credit card payment has to be made within the billing cycle. If payments are done within the cycle, there is no interest charged. However, if you default on your payments, you have to shell out a hefty sum. Loans, on the other hand, have interest rates which have to be paid over the loan tenure. Failure to make payments on time will lead to late payment charges.
  3. Control on spending
    The overwhelming benefit of a loan is that you may use only what you have borrowed. You cannot avail of additional funds without completing the procedure of a new loan application. Hence, there is a greater degree of control over your financial spending than credit cards. Plastic cards allow you to make multiple transactions which may lead to unnecessary expenditure.
  4. Fees and charges
    There are differences in the types of fees levied on credit cards and loans. An annual fee is levied for users using the credit card facility. Loans, on the other hand, have monthly service fees and charges like processing fee, pre-payment fee, and cheque bouncing fee.

Individuals who have outstanding debt on their credit card may opt for personal finance to pay off their debt. This consolidation of debt makes payment more manageable and allows borrowers to repay quickly. If you wish to have revolving credit round the year, a credit card is your best bet. You should always opt for a cost-effective option that meets your financial needs.