Personal loans and credit cards are both useful when you need to borrow money. You can choose to borrow money for any purpose. Depending on the type of loan and credit card balance, you can borrow a small or a large amount of money. When it comes to borrowing money, most people struggle to make a choice between a personal loan and a credit card. While both could be an effective solution to meet your financial goals, both are ideal in different circumstances.
Whether you use a credit card or a personal loan, there are a few things you will find common in them. You must have a decent credit report in order to qualify them. A good credit rating suggests that you have been loyal to your past payments, and therefore, you can easily qualify for a credit card with a higher limit and a personal loan at lower interest rates.
Bad credit borrowers are not repudiated, but lenders will restrict the borrowing amount and will charge high interest rates. This blog is aimed at differentiating between credit cards and personal loans.
What is a personal loan?
A personal loan is an unsecured loan that enables you to borrow a fixed sum of money to be paid down over an extended period of months. Personal loans are called unsecured loans because they are not secured against any collateral. Whether you borrow a small amount of money or a large amount, you do not have to put down your house as collateral.
As lenders do not have the right to repossess your personal assets to cover their money back in case of a default, the risk is too high on the part of the lender. In order to mitigate the risk involved in lending money to you, lenders charge high interest rates. Here are the key points for personal loans:
There are several types of personal loans
Personal loans come in various shapes and sizes. Some lenders call them small emergency loans, while others call them payday loans. As long as a loan does not require any collateral, it is called a personal loan regardless of its size. Personal loans are available for subprime borrowers, but they come with high interest rates. You can apply for these despite being unemployed. In order to qualify for personal loans for the unemployed, you must have a passive income source.
Small personal loans are approved this instant
The maximum amount of emergency loans is not more than £1,000. As the purpose of these loans is to meet unexpected expenses, lenders do not require too much formality to approve your loan. The decision is made by taking your repaying capacity into account. The loan application is approved the same day you put in the loan application.
However, this facility is available only for an emergency loan for bad credit with guaranteed approval. If you are looking to take out a larger personal loan, the approval criteria involve some formalities. It may take a few days to receive approval from your lender.
Personal loans are paid down in fixed instalments
Small emergency loans carry a very small amount of money. In most cases, it cannot be more than £500. Since the small amount of money cannot be spread across months, they are required to be discharged in one swoop, but if the loan amount is large enough, you will be required to pay down the debt in fixed monthly instalments. Depending on the sum of money, the repayment length could be between three months and 18 months.
What is a credit card?
A credit card is a physical card that you can use to purchase merchandise on credit. This is an ideal financing option when cash is tight. Every month, a credit card bill is generated. As soon as the bill is generated, you are supposed to pay back the amount along with added interest once and for all.
One of the biggest benefits of using a credit card is that you can use it as and when you want. You need to apply for them only once. Every month, you can come to know your credit card balance through a credit card statement. This will preclude you from maxing out your credit card.
It is crucial to pay off the balance on time, but at the same time, you should be careful while utilising your credit card limit. Despite clearing your credit card dues on time, a high credit card balance will reduce your credit score. A credit utilisation ratio should not be more than 30%. Here are important features to consider:
- Some credit cards could allow you to spread the cost of the purchase. This usually happens when they could be used to make large purchases.
- If you are struggling to pay off your credit card debt, you can transfer the outstanding balance to a new card, such as a balance transfer card.
- In case of a bad credit rating, your credit card limit will be low. On top of that, high interest rates will be charged.
When are a personal loan and a credit card ideal to use?
Credit cards and personal loans could be used to borrow money when you are in a tight spot, but it is always recommended that you should employ credit cards only to make small purchases. They are ideal to meet small emergency expenses. For instance, your car has broken down and needs immediate repair.
Personal loans, on the other hand, are ideal for making large purchases, such as if you want to refurbish your house. However, if you have enough cash to meet your expenses, you should not rely on loans or credit cards because they charge interest.
The final word
Personal loans and credit cards allow you to borrow money to meet expenses when you are in a tight spot. Credit cards are ideal to fund small emergencies, while personal loans are ideal to meet large expenses. Try to have a decent credit report because it will help you avail yourself of competitive interest rates.
