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It is often said that one should not spend beyond his/her means. With the evolution of the financial sector, the meaning of ‘means’ has changed from cash to other forms of capital. Earlier, the purchasing power of individuals was limited by the amount of cash they had, but now one can simply borrow money to spend.
Credit Cards and Personal Loans are some of the most popular means of borrowing funds. Both are offered by lenders at specific interest rates and have to be cleared off within a predetermined time frame. Even though both Credit Cards and Personal Loans have similar utility, there are several key differences between the two.
Personal Loan is a broad term for unsecured loans that are offered for a variety of end-use purposes. Personal Loans are akin to a term loan. The borrower gets a lump-sum amount at a pre-decided interest rate which has to be paid within a specific timeline. The total amount of the borrowing has to be paid along with the interest cost through scheduled payments during the tenure of the loan. Borrowers with a high credit score get Personal Loans at lower interest rates. A Personal Loan can be used for a variety of purposes like home renovation, marriage, making large purchases and consolidating Credit Card debt.
A Personal Loan is designed for instances which require a large amount of money like buying a car or home or making substantial modifications to an existing house. The cost of Personal Loan is considerably lower when compared to Credit Cards as they offer a larger amount. A high-interest rate on a large amount will make borrowing unviable for end users. Through Personal Loans, one can get access to the entire fund at once. It provides a lump-sum amount to the borrower. While a Personal Loan has a number of advantages, it also has certain drawbacks. A Personal Loan has lower interest rates when compared to credit cards, but may have processing fees and other charges. Personal Loans like car loans can require the usage of the vehicle as collateral.
Unlike a Personal Loan which is similar to a term loan, a Credit Card is a form of revolving credit. The financier sets a credit limit and the borrower has ongoing access to funds equal to the credit limit. Credit Cardholders are eligible for credit limit upgrades on a regular basis if they maintain credit discipline. The interest cost of Credit Cards is relatively higher than that of Personal Loans. With a Credit Card, borrowers do not get access to the entire amount at once like a Personal Loan. For instance, a Credit Card user with a credit limit of Rs. 1 Lakh does not get the entire amount at once. He/she can utilize the funds as per his/her requirement, but only an amount up to Rs. 1 Lakh can be used at any given time. The interest is also charged only on the amount that remains outstanding each month and not on the entire credit limit. If a Credit Cardholder has used only Rs. 10,000, the interest will be calculated only on Rs. 10,000 and not on Rs. 1 Lakh, which is the maximum limit. Credit Cards are generally unsecured loans, but one can also get a secured Credit Card by providing capital towards the card’s limit.
A Credit Card is a suitable option for people who make frequent purchases, especially online. Credit Cards provide revolving credit and hence interest is charged only on the amount that is utilised at any given time. People with good credit scores can get a Credit Card which offers a number of benefits on activities ranging from booking tickets to shopping. Credit Cards offer a number of benefits, but it comes with a relatively higher interest cost. Missing payments of Credit Card bills can also result in the accumulation of debt.
Both Personal Loans and Credit Cards are different financing options, meant for varied purposes. A Credit Card is not suitable for large expenses while a Personal Loan may not be of much use for small purchases. One should consider his/her requirements when deciding to choose between a Personal Loan or Credit Card. Depending on your requirements, you can avail of a Personal Loan or Credit card through Finserv MARKETS.