Unexpected expenses are a hazard of modern-day living. When you are suddenly pressed for cash, should you use your credit card or get a personal loan? We take a closer look at both options to help you decide which one is best for your circumstances. You may be surprised by the answer.
What Is a Personal Loan?
A personal loan is an agreement between you and a lending company to receive a sum of money now and pay it back over time.
The lender provides you with a lump sum of cash immediately after the contract is formalised. You are obliged to repay that sum, as well as all accumulated interest and fees, by a specified date. The repayment is made in regular installments as specified in the loan agreement.
These loans may be either secured or unsecured. A secured loan requires collateral, which is an asset that you own (or co-own). If you default on repayments a set number of times as stated in the loan contract, that asset may be seized by the loan provider.
An unsecured loan requires no collateral. It is perfect for borrowers who need quick cash. These loans are generally available to individuals with a higher credit rating. However, some lenders can extend them to locals and foreigners with low ratings, too.
Find out more on how to get a personal loan, regardless of your credit history.
When Should You Opt for a Personal Loan?
Personal loans are the easiest way to get a fast loan. They are most often used to:
- Pay for a large purchase
- Consolidate debt
- Home renovations
- Refinance existing debt
Why Should You Choose a Personal Loan?
A personal loan gives borrowers an organised and systematic way of managing their finances. Because there is a fixed amount that has to be paid on a fixed date every month, it is easy to make the necessary adjustments to your budget.
Pick a personal loan ahead of credit card debt if:
- You tend to be disorganised with your finances
- Want to clear your debt within a fixed time frame
- Have the discipline to make repayments as required
What Is Credit Card Debt?
Banks and other financial institutions issue credit cards to approved applicants, who use them to make purchases or payments on credit. This means that the card issuer pays for a purchase made by the cardholder and is repaid by them at a later date.
The cardholder does not have an obligation to repay the full amount or even a portion of it every month. However, the outstanding debt is carried forward every month and incurs interest. The cardholder can end up paying interest on an amount greater than the initial purchase.
If the debt reaches a pre-set limit, the bank may halt the line of credit until repayments are made.
The obvious advantage of a credit card is that there is no application and approval process every time they use the card. Once it has been issued, you are free to make purchases when and as you like (until you reach the credit limit).
When Should You Opt for a Credit Card?
Credit cards work as a fast loan. They are a convenient way to pay for recurring expenses as and when they arise. They are most often used for:
- Regular grocery shopping
- Purchasing everyday items such as clothes and apparel
- Travel (which often comes with complimentary insurance)
- Accommodation (home rental and mortgage payments as well as hotels)
Why Should You Choose a Credit Card?
All credit cards come with additional benefits apart from a line of credit. The most common are rewards points and cashback offers. Many banks also give successful applicants bonuses for signing up and loyalty rewards for staying with them.
Another popular advantage of credit cards is protection against fraud and poor-quality purchases. With a personal loan, you make all your purchases directly and there is no in-built protection.
Pick credit card debt instead of a personal loan if:
- You are good at juggling your finances
- You do not want to be tied down to a fixed repayment date
- You do not have the discipline to make regular fixed repayments
Making the Decision
A fast loan is the better choice in most circumstances when you need to make a big purchase. The inbuilt repayment formula can help you sink further into debt.
On the other hand, credit card debt incentivizes you to prolong the loan, which is in the credit card company’s best interests. So long as you pay back the minimum monthly amount, the rest of your debt continues to add up. You could stay in debt perpetually, paying back the interest but always owing money.
If you need quick cash and can’t decide between a credit card and a personal loan, here is a quick comparison to help you decide.
Advantages of a personal loan:
- A lump sum of cash immediately in your hands
- The total sum to be repaid is specified right at the start.
- There is a finite date for repayment, which helps you to control your finances.
Advantages of a credit card:
- Purchasing power as and when you need it
- Open-ended repayment
- Consumer protections
Remember to weigh the pros and cons carefully before you commit to either one.
