Personal Loan or Credit Card – Which One is a Better Option?

The two most widely used instant money tools are personal loans and credit cards. To choose a better option from these financial tools, you need to understand their working better. Here is an insight into both:

Personal loan

It is an unsecured loan which an individual takes from a NBFC for any private expenditure. The loan amount depends upon your credit score. 

Merits of a personal loan: 

• Online application, instant approval and quick disbursement of the loan
• The personal loan needs fewer documents
• Repayment is in the form of EMI, which helps to make a monthly budget
• Rate of interest is pre-determined and fixed for a fixed tenure
• No penalty for pre-closure of the loan on most of the personal loans
• There is no use-restriction on a personal loan. You can use it for any expenditure you like

Demerits of personal loans:

• A credit score of 750+ is ideal for getting a hassle-free personal loan. In case of low credit score, you either have to pledge some security or pay a higher interest rate.
• You have to pay a fixed amount as EMI every month irrespective of your current financial situation.

Credit card

It is a type of revolving account where you can borrow the funds multiple times until the stipulated upper limit. The repayment is monthly in the form of a total outstanding amount, all at a time. Once you clear the due amount, you can once again borrow the funds. The cycle repeats. There is no interest on the credit amount if paid within the due date. Interest is applicable on the amount in case of late payment.

Merits of a Credit Card

• You can use a credit card at multiple outlets as and when you want to
• Many types of credit cards are free for a lifetime. 
• Most of the merchandise accepts credit cards. It facilitates your transactions and lets you make purchases anytime, anywhere.
• The credit card offers many incentives and privileges to the cardholders upon its use. 
• Flexible repayment, either all at a time or in EMI. You can also pay the minimum amount and later pay the rest.

Demerits of Credit Cards:

• On failing the timely repayment of the outstanding amount, you have to pay the interest on the debt, which is generally very high.
• Some categories of credit card have an annual fee.

Personal loan vs. Credit Card

After getting an insight into the pros and cons of personal loan and credit card, let’s now compare both and decide which the better option is:

Feature	Personal Loan	Credit Card
Documentation	Relatively more documents are required	Relatively fewer materials are required
Interest Rate	Individual loan interest rate is relatively lower and is of reducing type	Credit card due payment is interest-free unless it gets accumulated as debt. The interest rate applicable then is flat
Tenure	Long	Short
Loan Amount	Big amount	Small amount
Good Credit Score	Essential to get a personal loan at a lower interest rate	Necessary to have a credit card free of any charges
Lender	NBFCs offer personal loan	Only banks offer credit cards

You can use a credit card when:

• You can pay your dues on time. 
• You want to spend money instantaneously. 
• You do not meet the eligibility for a personal loan.
• You do not have any collateral to pledge.

A Personal Loan is preferable when:

• You have a good credit score.
• Personal loan interest rate is lower 
• You want a bigger loan amount
• You wish to repay the loan amount over a long period.

The Bottom Line

Both personal loan and a credit card are an excellent means to get instant money. The choice of the better depends upon your need for the funds, credit score and repayment ability. Credit card is better when your credit score is weak, and personal loan is better when you want a significant amount for a long tenure and lower interest rate.