For financing everyday expenses, or even to pay off debt, using either a credit card or taking a personal loan could help. However, each product has unique features that may suit you depending on what your specific goals are.
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Here is how the two compare to help you choose the best option.
Personal loans
Personal loans come with a variety of options within the category that can affect credit terms. The difference between a personal loan and a credit card is the long-term balance of a personal loan.
Personal loans do not offer ongoing access to funds unlike a credit card but allow repayments over an extended period. A borrower of a personal loan gets a lump sum amount up front and has a finite time frame to repay it in full, through scheduled payments. It may come with lower interest than credit cards for a good-to-high credit score.
Personal loans can be secured or unsecured loans which are not backed by collateral. It can offer funds to finance large purchases, consolidate credit card debt, repair, or upgrade a home. A service fee and other fees may be charged that adds up. In case the loan is secured then property used as collateral, and can be seized in case of failure of repayment.
When to take a personal loan?
Personal loans usually are best for when you have large, one-off expenses like car repairs or home improvement projects, among others. They can also be used to consolidate high-interest debt into a single loan with a lower interest rate. Personal loans can come in handy if a longer repayment period is needed or when you need funds for making multiple cash payments or when you want tangible options for debt consolidation.
Credit cards
Credit cards fall into a class of borrowing known as revolving credit. With a revolving credit account, the borrower has ongoing access to the funds. Credit cards come with a maximum limit, but users do not have access to a lump sum amount at once. Revolving credit card accounts may also be eligible for credit-limit increases on a regular basis. Interest is paid only on the funds that are used.
Credit cards can come in many varieties that offer convenience and benefits. The best credit cards can include 0 percent introductory interest periods, balance transfer availability, and rewards on every transaction. However, some cards may come with high annual percentage interest rates combined with monthly or annual fees. Credit cards can be used anywhere electronic payments are accepted.
Credit cards can also be unsecured or secured. Unsecured cards offer credit with no collateral while secured cards require to borrowers to provide capital towards the card’s balance limit.
Some credit cards offer the advantage of a statement cycle grace period. This allows users to borrow funds that are interest-free for 30 days if the balance is paid before the interest begins to accumulate. Other credit cards charge daily interest, and the final interest is charged at the end of the month. The interest rates are typically higher than personal loans.
When to apply for a credit card?
Here are a few instances when you should go for a credit card:
