When you need quick access to funds, instant* personal loans and credit cards are two of the most common borrowing options. While both offer financial flexibility, they function quite differently in terms of interest rates, repayment structures, and ideal use cases. Which one is the better option for you largely depends on your specific financial situation, needs, and goals.
In this article, we’ll break down the key differences between personal loans and credit cards to help you make an informed decision.
Understanding Personal Loans and Credit Cards
Before comparing the two, it’s essential to understand how each of these financial tools works.
Personal Loans
A personal loan is an unsecured loan where the lender disburses an approved amount to your account, and you repay it over a fixed tenure through EMIs (Equated Monthly Instalments). The loan amount, repayment tenure, and interest rate are all agreed upon upfront. Common uses for personal loans include consolidating debt, paying for home renovations, covering medical expenses, or funding large purchases.
Credit Cards
A credit card provides a revolving line of credit, meaning you are given a set limit and can borrow against it as needed. You can repay the borrowed amount over time, but any outstanding balance accrues interest if not paid in full by the due date. Credit cards typically require a minimum monthly payment, which is a small percentage of the total balance owed. They are commonly used for everyday purchases and emergencies.
Comparing Key Features of Personal Loans and Credit Cards
1. Interest Rates
- Personal Loans: Interest rates for personal loans are typically lower than credit card rates, especially for eligible borrowers with a strong credit score (ideally 750+).
- Credit Cards: Credit card interest rates are usually much higher than personal loan rates, particularly if you carry a balance from month to month. High interest rates can cause debt to quickly spiral out of control if you’re not paying off the balance in full each month.
2. Repayment Tenures
- Personal Loans: Personal loans come with fixed repayment tenures, typically ranging from 12 to 60 months. This structure is beneficial for budgeting and financial planning, as borrowers know exactly when the debt will be cleared.
- Credit Cards: Credit card payments are flexible, but the required minimum payment is often just a small percentage of your outstanding balance. These cards do not have a fixed repayment period, and the debt can technically carry on indefinitely as long as you make minimum payments.
3. Loan Amounts
- Personal Loans: Personal loans typically provide a lump sum of money, and the amount you can borrow is determined by factors such as your credit score, income, and existing debt obligations. Trustworthy lenders, such as SMFG India Credit, offer personal loans of up to INR 30 lakhs*, allowing you to cover major expenses like higher education or debt consolidation.
- Credit Cards: The borrowing limits on credit cards are usually lower than those of personal loans. Credit cards are designed for smaller, everyday purchases, rather than large financial commitments.
4. Impact on Credit Score
- Personal Loans: When you take out a personal loan, the lender may raise a hard enquiry on your credit report, which can cause a slight temporary dip in your credit score. However, if you make on-time payments, a personal loan can positively affect your credit score by demonstrating responsible borrowing behaviour and potentially improving your credit mix (having different types of credit).
- Credit Cards: One of the most important factors affecting your credit score is your credit utilisation ratio, which is the percentage of your available credit that you use. A credit utilisation above 30% can negatively impact your score while maintaining a low utilisation and making timely payments can help improve it.
When Is a Personal Loan Better Than a Credit Card?
A personal loan may be a better option if:
- You need to borrow a larger amount of money.
- You want fixed monthly payments and a clear repayment timeline.
- You are consolidating high-interest debt from multiple credit cards and want a structured, simplified repayment plan.
When Should You Use a Credit Card?
A credit card could be ideal when:
- You want ongoing access to credit for daily purchases.
- You can pay off your balance in full every month to avoid interest charges.
- You want to take advantage of rewards, cashback, or travel perks offered by certain credit cards.
Conclusion
Ultimately, whether a personal loan or a credit card is the better choice depends on your specific financial needs, borrowing amount, and ability to manage debt. If you’re looking for a structured repayment plan, a larger loan amount, and a competitive interest rate, a personal loan may be the better option.
Regardless of which option you choose, it’s essential to assess your ability to repay the debt and consider the total borrowing costs – including additional fees and charges such as processing fees and late payment penalties. Practising responsible borrowing is key to maintaining your financial health.
*T&C apply. Loan eligibility, loan terms, and loan disbursement processes are subject to the lender’s policy at the time of loan application.
