You may find yourself borrowing money to finance critical projects, which may force you to either apply for a personal loan or use your credit card. However, it is essential to note that borrowing money can lead to financial success or bankruptcy. It is necessary to familiarize yourself with the pros and cons of credit cards and personal loans.
According to a survey, most people prefer borrowing through their credit card or taking a personal loan. Having in-depth knowledge of how credit cards and personal loans work can help you make the right decision. Based on research and expert’s advice, here are the differences between personal loans and credit cards.
Credit Card
A credit card is a card that gives you the chance to borrow money within your credit limit. Moreover, credit cards are commonly known as revolving debt because they do not have a fixed amount of payment every month. Furthermore, the charges are based on the real balance of the loan.
One major disadvantage of credit cards is that its interest is calculated using the annual percentage rate (APR). Therefore, it is subject to change throughout the repayment period. Higher APR means a high interest rate on the credit card.
Pros of Credits Cards
Introductory Rates Discount
In most cases, financial institutions give away 0% APR on new cards or balance transfers. This means that if you pay your balance within the agreed period, your interest can be waivered by 100%.
Easy Access
Credit cards are allowed in most retail shops and can be used whenever you want provided you have the card with you. It is also a secure mode of payment when making online purchases. You can also buy tradelines to help boost your credit card score. Unlike personal loans where you have to make an application to receive the loan, with credit cards you can borrow immediately provided that the card has some money on it.
Personal Loans
A personal loan is an unsecured loan that can be obtained from banks, credit unions, or online lenders. This is usually done by making a formal application quoting the amount of money that you want. The terms and conditions of the loan may vary from one financier to another.
Lenders use your credit history and report to decide whether to give you the loan or not. In credit cards, APR is used to calculate interest. However, in personal loans, your credit score is used to calculate the interest rate to be paid plus the amount borrowed. Having a high credit score means that low interest rates will be attached to your loan. The interest rate is usually fixed.
Other benefits of personal loans include;
Higher Borrowing Limit
With credit cards, your borrowing must be within your credit limit. On the other hand, in personal loans, you can request any amount provided that you can pay it with interest.
Longer Repayment Periods
Personal loans have more extended repayment periods, for example six years, whereas in credit cards, you are required to repay the balance or loan within 18 months or less.
