Personal Loan vs Credit Card: Eligibility to interest rates, check key differences

Emergencies can hit when you least expect them, whether they be a medical issue, home repairs, school fees, or even last-minute travel plans. And when you need quick cash, it can be tough to decide how to get it.

Credit cards and personal loans are two popular go-to options in such cases. Both offer fast access to funds, but they differ in aspects like eligibility, interest rates, and repayment terms.

Personal Loan vs Credit Card

A personal loan is a lump sum amount given to the borrower with a fixed interest rate and a set repayment term. This is an unsecured loan that doesn’t require any collateral or security in order to get funds.

A credit card is a short-term loan where you spend within a set limit and repay monthly, either in full or in parts. Interest is charged on the remaining amount you owe.

Here are the key differences between personal loan and credit card:

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Why some people use credit cards instead of personal loans?

Despite the high interest rate and inflexible repayment tenure, some people prefer credit cards over personal loans. Here’s why:

1. Instant funds received

With a credit card, funds are accessible immediately. No separate approval required once you receive a credit card with a given credit limit. This is unlike personal loans, which may take 2-3 days for disbursement.

2. No interest rate grace period

Sometimes, you might miss a payment due date. For personal loans, interest is charged daily on the outstanding amount after the due date.

Credit cards offer an interest-free grace period, typically between 20 to 50 days. During this period, no interest is charged if you pay off the full balance. Interest rates are applicable on the outstanding balance if you do not pay the bill in full.

3. Rewards and cashback

Credit cards also give you rewards for spending. These rewards can be in the form of reward points, cashback, airport lounge access, fuel surcharge waivers, OTT subscriptions, free movie tickets, discounts and offers. The reward points can also be used to book flights and hotels.

When should you go for a credit card over a personal loan?

Credit cards offer many benefits, especially in emergencies like last-minute travel or medical needs. That said, they may not be the best choice for large expenses.

One reason is the credit limit, which restricts how much you can borrow. Credit cards also usually have higher interest rates compared to personal loans, making them more expensive in the long run.

Credit cards work best when you need funds for a short period, usually for around 30 to 45 days. You should use a credit card only if you are confident about repaying the amount quickly. Small amounts can be repaid quicker, but larger dues may take time to clear, and interest will keep on adding, potentially putting a strain on your finances.

These cards are also a good choice when you want extra perks, like rewards, cashback, discounts, and offers on the amount spent.

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Conclusion

Credit cards and personal loans are both viable forms of borrowing, but which one is best for you will rely on your financial state, the urgency of your needs, and your ability to repay.

Using a credit card or choosing a credit card loan can be beneficial if you have a clear repayment plan and need immediate cash for a brief period of time. A personal loan is typically a better option if you need a larger amount, prefer lower interest rates, and want more scheduled repayments.

Summary

Need funds in a hurry? Find out whether a credit card or personal loan is the smarter choice based on your requirements.

Disclaimer

This piece/article was written by an external partner and does not reflect the work of Moneycontrol’s editorial team. It may include references to products and services offered by Moneycontrol.