While it is always best to have enough savings, there are instances when borrowing is the only option. In such instances, it is always better to have information on which type of financing is better — taking a personal loan or using a credit card. While both options will help you get the money you need, they both work under very different terms. So, it is important to evaluate your financial standing before deciding which of the two options will be better for you. In both personal loans and credit card payments, you will find that funds are offered by a lender at a specified interest rate, monthly payments that include principal and interest, late fees, and more.
Differences between personal loans and credit cards:
Credit cards are revolving credit, which means you can borrow money as you need it and your payments are based on how much outstanding balance you have at a given time. Personal loans are installment loans in which you receive money in a lump sum and can repay the loan in even payments over time.
When to opt for a personal loan:
Personal loans are a good option to consider when you have a large one-off expense, for example, car repairs or home renovation projects. Unsecured loans are not backed by collateral pledged from the borrower. Personal loans usually offer low interest rates
Disadvantages of personal loan:
Personal loans are meant to be taken out infrequently and for large expenses. So, if you require funds for small purchases or on a regular basis, a personal loan may not be the best option. Personal loans also don't offer rewards.
When to use a credit card:
Credit cards are meant for smaller purchases and more frequent expenses that can be paid off relatively quickly. Credit card companies only charge interest if the credit balance is carried forward from one month to the next, by paying it off entirely you can be debt-free from your short-term loan. When this method is followed, you can put all your spendings on a rewards card, so you can have all the benefits without paying interest.
Disadvantages of credit cards:
While the biggest advantage of credit cards is the ease of buying things by simply swiping the card, it is also its biggest disadvantage, as it is easy for you to get dragged into exceeding your debt. A close look at the minimum payment requirement will also indicate that you could essentially be paying off the same balance for years, especially with the high interest rates that credit cards usually carry.
So, whichever option you choose, weigh the pros and cons carefully before you make a decision.