Financial emergencies come without warning; in such moments, quick money options like credit cards and personal loans become a significant support. Both options offer instant money without any need to give security or collateral. But they work very differently, and picking the wrong one may lead to high interest, extra charges, or even a debt trap.
So, how do you decide whether to swipe your credit card or apply for a personal loan? Let’s understand both features and find out which suits your situation better.
Credit Card and Personal Loan – Both Are Unsecured Loans but Serve Different Purposes
A credit card and a personal loan both fall under the category of unsecured loans, meaning you don’t need to give any property or asset as security. But the way they work is not the same.
- A credit card is like a ready-to-use loan that you can borrow again and again till your limit is available.
- A personal loan is a fixed amount given to you once, which you repay in monthly EMIs.
So, even though both are used for getting money in tough times, their usage, repayment methods, and interest charges are entirely different.
Credit Cards Allow Repeated Use – Unlike Personal Loans
One of the most significant benefits of a credit card is that you can use it again after repayment. If you clear your credit card bill, you get your full credit limit back and can use it again. This is useful for people who face small cash crunches often.
But in the case of a personal loan, you get the money only once. If you need more, you must apply for another loan, which involves rechecking your credit score and income. So, repeated personal loans are difficult and may affect your credit score negatively.
Credit Card Offers Interest-Free Period, Personal Loan Does Not
Credit cards offer a grace period – usually up to 45-50 days – where no interest is charged if the full bill is paid before the due date. So if you repay on time, you don’t have to pay any extra amount apart from what you spent.
But in personal loans, you start paying interest right from the first EMI. There is no grace period. Whether you spend the money or not, your EMI starts from the very next month.
So, if you are sure of repaying soon, a credit card gives you the benefit of interest-free borrowing.
No Need to Be a Bank Customer for Credit Cards
You don’t always need a savings account in that bank to get a credit card. Many banks offer credit cards even to non-customers based on proof of income or credit history.
However, having a bank account in the same bank is usually a must for a personal loan. Banks check your salary, account statement, and other financial documents before approving your loan.
A credit card might be easier to get if you need quick money and don’t have much paperwork ready.
Extra Rewards and Cashback Only with Credit Cards
A primary reason why credit cards are popular is because they come with reward points, cashback offers, discounts, and gift vouchers. These offers are based on how and where you use the card.
But personal loans don’t give any such benefit. You only get the loan amount and repay it with interest.
A credit card can give you more value through such rewards if you shop or spend regularly.
Loan Closure Rules Are Tougher for Personal Loans
You can clear your credit card bill at any time. If the outstanding amount is significant, you can even convert it into EMIs. But this conversion involves processing fees, GST, and sometimes extra interest.
In personal loans, you cannot repay the entire amount before a fixed period without paying prepayment charges. So, closing a personal loan early may not always be free.
Always check the terms and conditions of the bank if you plan to repay early.
When Should You Use a Credit Card?
Experts suggest using credit cards only when:
- You need a small amount of money
- You can repay the full amount within the grace period
- You are confident about managing the bill without delay
This way, you can enjoy the benefit of zero interest and continue using your card again without extra cost.
However, if you swipe your card for a significantly hefty amount and fail to pay it on time, the interest rate can go up to 36-42% annually, which is very high compared to personal loans.
When is a Personal Loan the Right Choice?
A personal loan is better if you need a larger amount and a longer repayment period.
Reasons to choose a personal loan:
- You get fixed EMIs, so managing your monthly budget is easy.
- Interest rates are lower than credit cards – usually between 10% to 18% annually.
- You can choose a loan tenure from 1 to 5 years, according to your comfort.
So, personal loans are a more comfortable and affordable choice if you want a one-time large fund for medical bills, education, or any big purchase.
Final Take: Credit Card for Short-Term, Personal Loan for Long-Term
Use your credit card for short-term needs and repay before the due date. For anything long-term or bigger in value, go for a personal loan after checking interest rates, processing fees, and repayment terms.
Thoughtful financial planning is not just about getting a loan – it’s about choosing the right one per your repayment capacity and avoiding debt traps.
Source: Zee Business
