Personal Loan v/s Credit Card Know Which one is the best choice?

When you are in urgent need of money, a credit card or personal loan seems like the best idea. Traditionally personal loans were provided by conventional lenders after a lot of paperwork. This is the reason why people preferred credit cards as an emergency funding tool. But credit card has their own limitations. Now, with personal loan apps, you might just get a better deal. Here is a detailed comparison to help you decide which is better. 

What is credit card and how does it work?

A credit card is not primarily a debt instrument but a payment instrument. The basic purpose of a credit card is to act as a mode of payment that expects you to pay your due in full at the end of the billing cycle. The ‘credit’ part in credit cards is primarily limited only to a certain time and interest is only charged when you miss your due payment amount. What credit card provides you, is a revolving credit system, where you use a certain amount from your limit and pay it all back in time. The relationship continues on and on. 

Limitations of credit card as a debt instrument:

• Firstly, using a credit card works out to be much more expensive because both the interest rate and processing fee work out to be much higher.
• In addition to the interest charges and processing fee on a credit card, you need to pay annual card charges as well. 
• Unlike a personal loan, you cannot do comparison shopping on a credit card loan. 
• No matter how high a credit score you maintain, you will still be charged the maximum possible interest rate and processing fee when you borrow from the card.
• Credit card loans can only be taken for a certain portion of your current card limit.
• The penalty for missed payment is extremely high on a credit card. Plus, there is also a risk of downward revision of the card limit. 

What is a personal loan and how does it work?

A personal loan on the other hand is specifically built to act as a debt instrument. It has a defined structure and repayment plan. You borrow a fixed amount, repay it according to a pre-set plan within a pre-set period and then you are done with it. There is no ongoing relationship where you can keep on taking money and paying it back. If you need more funds, you go back to the lender and apply for a loan from the beginning. 

Advantages of personal loan over a credit card 

• A personal loan works out to be a much cheaper deal than a credit card. From the very beginning, the interest rate on a personal loan will be much lesser than on a credit card. Then, the fact that processing fees on a personal loan will always be much lower than what is charged by a credit card also makes it cheaper. Plus, if you borrow from a personal loan app, the deal works out to be even more affordable because an app loan costs less than many conventional lenders as well. 
• Unlike a credit card where you may be required to pay an annual card maintenance fee, there is no such extra charge on a personal loan. All your payments are as per a fixed schedule which you pay as an EMI and there is no risk of any new dues coming up midway through the loan. 
• Unlike a credit card loan where there is only one offer and scheme from a card and most cards broadly charge the same terms and conditions, you can shop around for a personal loan from multiple lenders. 
• With a personal loan, the interest rate and other charges are also adjusted based on your credit score. If you have a good credit score, you get a better deal. 
• You can get an online loan app that provides you much higher borrowing limit than any credit card. Much higher loan eligibility makes it much more useful than any credit card loan. 
• With an online loan app, you do not need to go out of your home to find an ATM. The entire process is done online and you can have it completed in a matter of minutes. The money is transferred directly to your account. There is no need to handle cash which is generally what an ATM dispenses when you borrow on a credit card. 
• Finally in case of a missed EMI, a personal loan will not charge as a heavy penalty as a credit card. 

To conclude

As can be understood from above, speed was the only advantage that credit cards had on personal loans but thanks to the emergence of personal loan app, even that reason is eroded. If you want a good deal, always choose a personal loan over credit card debt.