When you face a financial emergency, you either resort to swiping a credit card or getting a personal loan. Perhaps you want to renovate your home, pay off your child’s education fee or even consolidate a debt, at such times both credit card and a personal loan can give you a quick influx of money. While both types of financing options offer you instant access to money, in reality, they work very differently. Read on to know the difference between a personal loan and a credit card to get a clear understanding.
What is an instant personal loan?
An instant personal loan is an unsecured loan that can be availed to address different financial emergencies such as funding higher education, home renovation, paying off medical bills, debt consolidation, travel or any other purpose. This type of loan can be availed instantly without any collateral at low-interest rates. Today, with digital advancement, one can avail of an instant loan online without doing any paperwork or waiting for days to get the loan disbursed. The loan is offered based on your income, credit score, age, and employment status among other factors.
What is a credit card?
A credit card is a card that comes with a pre-approved limit that can be utilized for catering to any financial emergency or for shopping purposes. It is a form of revolving credit that has to be repaid to the bank after 30-40 days. The card can be swiped for addressing any type of financial requirement and has to be repaid within the stipulated time frame to avoid penalty charges. One can also avail a loan on credit card within the pre-approved credit limit and repay it in EMIs. The interest for a credit card loan is usually higher than a personal loan. A credit card limit is offered by the bank based on your credit score, income, employment status, and other criteria.
Difference between a credit card and personal loan
Purpose: Both credit cards and a personal loan can be availed to address situations that require quick financial assistance. However, opting for either of the one depends on your loan amount requirement. If you want to make a big purchase then opting for a loan would be the right choice. On the other hand, if you want to make a small purchase, then swiping the credit card would be an ideal thing to do.
Disbursal: Depending on your loan eligibility criteria, the loan amount is disbursed directly into your bank account by the lender. This ensures that you get quick access to cash that you can further utilize for any purpose. On the other hand, credit card disburses the amount directly to the merchant without giving you access to any cash. However, you can also avail of a loan on credit card within the pre-approved limit. The interest rate on credit card loans is generally higher than that of a personal loan. The tenure of a credit card loan is 12 months-60 months and the loan amount is given on offer to customers having a good repayment record. When using a credit card, it is imperative to know that withdrawing cash from a credit card attracts a cash advance fee and other finance charges.
Repayment: For an instant personal loan, repayment has to be made in EMIs until the repayment tenure chosen by you; it can be availed for a tenure of 12 months-60 months. Depending on the loan amount and interest rate, you will have to make the repayment on a monthly basis. When it comes to repaying credit card bills, you will have to do that every month depending on the spends you make each month. The credit card bill is generated each month and the bill amount has to be paid on the due date given by the lender. Not making the credit card bill payment on time attracts late payment charges and also lowers your credit score. You can also choose to pay the minimum amount due on a credit card instead of paying the full bill. However, paying only the minimum due amount requires you to bear the interest and other finance charges.
Borrowing limit: The instant personal loan amount that you can borrow is given based on your credit score, employment status, monthly income, age, and other factors. Subsequently, the credit card limit is pre-approved depending on your salary and credit score. Credit card funds can be utilized only up to the given limit and using more amount can make you liable to pay finance charges.
Interest rate: This is one of the major points of difference between a loan and a credit card. Usually, an instant personal loan is offered at an interest rate ranging from 10%-15%, whereas interest on credit card loans is generally 13%-18%. The interest charged on an instant personal loan is on a reducing rate, whereas, the interest charged on credit card is on a flat rate. The repayment of personal loan principal amount along with applicable interest has to be done every month in the form of EMI, whereas, credit card interest accrues only at the time of default made on clearing the outstanding dues in full.
Before opting for either one of the financial products, it would be wise from your end to make a financial plan and also weigh its obligations to ensure you make the right pick.