Personal Loans vs Credit Cards: What should you take ?

Personal Loans vs Credit Cards: What Should You Take?

Personal Loans vs Credit Cards: What Should You Take?

Credit is a vital social instrument. It helps people build businesses, gets you through tough times and meets unforeseen expenses. A healthy level of lending spurs economic growth. In fact, most economic growth can be attributed to credit. Though there are multiple kinds of credit offered by banks and lending institutions for all kinds of needs, personal loans and credit cards primarily extend credit to individual consumers.

Most of us have had or would have to confront tough times in life when we could do with some help. Here’s where Personal loans and Credit cards come in, fulfilling individual demand for instant and mostly unsecured credit.

So, if you’re there now where you need some money and unsure about what to choose between a personal loan and a credit card, here’s what you need to know.

Personal loans & credit cards – The similarities


Both personal loans and credit cards are debts, lines of credit extended to individuals most often without security. That is, these loans don’t require you to pledge/mortgage collaterals. In place of collateral, these loans use your credit score, to decide your place in the pecking order for loan grants. Your credit score reflects your past credit history, credit payments on time and is an assessment of your ability to pay the debt in time.

If you think personal loans and credit cards seem just the same from what you’ve read so far, you won’t be wrong. But this is where the similarities end between two very different kinds of debt. Here’s how personal loans and credit cards differ from each other.

Personal Loans vs Credit Cards: What Should You Take?



While personal loans enable you to access the entire loan amount instantly just like credit from credit cards, you pay interest on the entire borrowing from day one. With credit cards, you have to pay interest only on credit you spend. While this might make credit cards seem a better option, people are more likely to run up debts on credit cards than on personal loans. With personal loans, the entire scheme of debt settlement is laid out as monthly or periodic payment installments and the risk of default is limited as credit is fixed and granted in full.

But with credit cards, the debt is revolving, that is, the credit line is always open and you can keep on borrowing even after repayment of previous debt as long as you don’t reach the credit limit. Also, credit cards will let you get by with a minimum payment every month, inducing people to pile up outstanding debt that accrues interest.

Personal loans offer greater sums of money than the credit limits of credit cards and offer one the ability to repay over longer periods.

Rates of Interest

Personal loans commonly offer a lower real interest rate than credit cards. With some personal loans that offer a diminishing interest rate, though you have to pay interest on the entire loan sum from the start, with each successive repayment, the principal on which interest is calculated decreases. Banks may offer personal loans at flat interest rates and the debt is paid back in Equated monthly installments (EMI). P2P lending institutions charge a diminishing interest rate, which works out to be a fairly attractive option to many people.

Credit card interest is often higher than personal loan rates, though rates advertised may appear deceptively lower due to hidden charges and compounding of interest being left out from the advertised rate. This is factored in Annual percentage yield (APY), which is the effective real rate of interest you pay on credit card debt. The APY is often higher than personal loan interest rates.

To offset the higher effective interest rate and make credit cards attractive, issuing banks provide promotional offers like cash backs, rewards, and discounts on purchases. But, beware of default as outstanding dues after the promotional period are often retroactively charged with interest.

Making a choice

If you have a credit need that you can pay back in a short period, you can opt for a credit card that offers low or promotional 0% interest rates and settles the debt before you accumulate considerable interest. If the benefits you incur from paybacks and rewards justify the costs, you can get yourself a credit card. But if you need a large sum that you can only pay back over a long period, you should shun credit card debt and sign up for a personal loan.

Though credit cards make borrowing as easy as swiping a card or pressing a button, they are not suitable for major transactions or for long-term debts and are best used in day to day purchases. Injudicious spending might bury you in deep debt.

A personal loan on the other hand, though not as easy to procure as a credit card, offers a fixed sum at a relatively lower interest rate with easy long-term payment schemes. Thus, personal loans can be used to finance major expenses. Further, with the advent of peer to peer (P2P) lending institutions, getting personal loans has become far easier, enabling one to meet even minor expenses with such loans. A large number of people are now coming in droves to access these P2P loans to grow their businesses and meet their needs. 


P2P Lending in India: 10 things you should know
The 5 Most Common Problems Borrowers Face In India

One comment

Leave a Reply

Your email address will not be published. Required fields are marked *