One of the oldest financial pieces of advice you would hear is “It’s always a good idea to save” and it’s true but it’s not always possible to save. When you don’t have enough savings but are facing a huge expense or crisis, you will need to decide which kind of financing would be suitable for your situation; personal loans or credit cards?
Both options can help you get the necessary funds but under drastically different terms. Since personal loans aren’t taxable income they are great for big purchases while credit cards offer great benefits and rewards for smaller purchases that can be paid off at the end of the month. Depending on your financial requirements and income, one option might be better than the others for you. We are here to help you figure out which one would benefit you more.
Personal Loan vs Credit Card
The most notable difference between a personal loan and a credit card is that they both implement different types of credit. Personal loans are installment loans where you receive the whole amount at once and then repay the loan in fixed monthly payments over a certain period. A big benefit of personal loans is that there are no laws about personal loan taxable income so big purchases do not affect annual tax filing. Credit cards are revolving credits that allow you to borrow money and your payments are based on how much outstanding balance you have at any given time.
When is a personal loan suitable for you?
If you have a good credit score and need a large amount of money, opting for a personal loan may be a good option. It offers you consistent, predictable repayments and may give you a low-interest rate if you have a good credit score and stable income.
Personal loans can also help you pay for significant expenses that can’t be saved up for like wedding costs and unexpected home repairs. Personal loans will likely cost you less in terms of interest rate.
Pros & cons of personal loans
You need to do thorough research on personal loans but here’s a shortened version of their pros and cons to help you understand better:
Pros
- Lower average APR
- Great for debt consolidation purposes
- Fixed monthly repayments
Cons
- No rewards or benefits.
- Multiple fees
When is a credit card more suitable?
Credit cards are best for smaller, frequent expenses that you can pay off quickly. It’s even recommended to pay off the entire bill before the due date because credit card companies charge interest only if you carry a balance from one month to another. Credit cards require you to have a bit of discipline because it’s easy to start spending more than you can afford to pay off.
A lot of credit card lenders offer a 0% APR introductory period where they charge no interest rate, usually between 6-21 months. During this period, you will incur no interest on new purchases or transfer of balance.
Pros & cons of credit cards
If used responsibly, a credit card can be a great way to earn cash back, travel discounts, and rewards. However, a credit card can also damage your credit score if you aren’t mindful.
Pros
- Benefits & rewards
- Easy way to build credit history
- Convenient for everyday purchases
Cons
- High-interest rate
- Easy to overspend
- Multiple fees
Conclusion
A credit card is great for everyday expenses and great benefits but if you outspend your budget, it can lead to a much greater debt. Personal loans are similar in the sense that if you miss any repayments, your credit score will sustain heavy damage. So, before you decide on either of them, do a thorough research and analyze your financial situation. Whether you settle on a personal loan or a credit card, you should research different lenders to ensure you get the best possible offers, lowest interest, and reasonable terms.
Read more: Finding Your Perfect Personal Loan Solution