Which Financial tools help you the most when you need unsecured credit? Your answer is probably a personal loan or credit card, or both! But have you ever thought about which one is better?
This article draws comparisons between these two financial products. Maybe they are not better than each other. Instead, they are suitable for different types of requirements. Let’s find out!
Everyone knows what a personal loan is. But to put it in defining words, it’s a loan that you get based on your documentation, credit history, CIBIL score, etc. A crucial benefit of a personal loan is that you get it without collateral.
You obtain a personal loan on a fixed interest rate for a particular time. Therefore there’s a fixed amount you need to pay every month to repay a personal loan. This certainty is an advantage that personal loans have over credit cards.
Utilisation of Personal Loan
You can understand where to use personal loans by knowing their best features. They are:-
- The repayment is spread across years.
- You need to pay a fixed amount every month, so budgeting becomes effortless.
- There’s no collateral involved.
Keeping these features in mind, it’s best to use a personal loan for arranging bigger funds such as:-
- Purchasing a car.
- Expensive holidays.
- Consolidating various high-interest credits into one manageable monthly repayment.
- Arranging funds for marriage.
- Any other big purchase.
- Arranging down payment for a consumer loan, home loan, etc.
A credit card is a line of credit that provides you with a card to make everyday purchases. However, credit card companies bind you with a credit limit. Your credit limit depends on your credit history.
The credit card offers flexible borrowing and flexible repayments, unlike personal loans. Your monthly credit card statement or bill shows your total due amount and a minimum due amount. You need to pay the minimum due amount to avoid interest. These amounts differ every month based on your expenses via credit card.
You May Read: Golden Rules to Follow When Taking a Loan
Utilisation of Credit Card
You can use a credit card for regular expenses only. The primary reason is that you rarely get a very high credit limit. It’s generally enough for mid-range to smaller purchases only. For instance, you can buy your wedding dress with a credit card. But if you need to arrange funds for your wedding, you need a personal loan.
Another reason for not making a significant purchase with a credit card is its high interest rate upon non-payment of the minimum amount. And you pay higher interest if you take out cash through your credit card. There’s a late fee as well.
You can afford a late fee and interest on a smaller amount. But it will kill your budget if you buy a costly item and fail to pay on time.
Impact of Personal Loan & Credit Card on Your Credit Score
Any debt, whether it’s a credit card, personal loan, or any other kind of loan, does have an impact on your credit score. But how they affect your credit score depends on how responsibly you repay your debts. Pay your credit card bills on time, and don’t miss your personal loan installment to enjoy a considerable credit score.
Pro Tip: Keep your credit utilisation ratio under 30% to get a remarkable credit score. The credit utilisation ratio is the percentage of what you spend out of the credit limit provided to you by the credit card company.
Credit cards and personal loans both are incredible helping hands when you need an immediate cash infusion. But how much cash you need and for how much time will decide which one you should use. Hopefully, the information provided in this article will help you make an informed decision. And whichever financial assistance you choose, don’t forget to repay on time for the sake of your credit score.