Times have been pretty hard lately, so there’s no shame in admitting that we might have considered taking out a personal loan at more than one point already. However, some people also opt to use credit cards instead of taking out a personal loan—is there a benefit when you choose the latter? There are some key features in using both options and by understanding them, you can make informed decisions about which one caters to your needs better.
What is a personal loan?
A personal loan is when you borrow a lump sum from a financial institution or lender, which you pay in fixed monthly term payments for a specific period. There are many types of loans, but the two main ones are unsecured and secured. The first one mostly requires a good credit history and proof of income, but it has higher rates. In contrast, secured loans require collateral, usually a car, your home, or any other assets you need to surrender in case of a default. Many institutions prefer personal loans because some, like Handy Finance personal loans, have a low interest rate and fast approval process.
Key features of a personal loan:
A personal loan has a lot of advantages; apart from that, you can use it for different purposes, but here are two more crucial features of it.
It has a fixed interest rate. One of the advantages of taking out a personal loan is that it has a fixed interest rate, which means the cost of borrowing the funds remains the same throughout the period.
You have a set repayment schedule. It also has a fixed repayment schedule, so you don’t have to worry about shelling out extra money or expenses and focus on paying the amount on your due date.
Collateral. For those looking at personal loans with lower rates, secured loans are much lower than their counterparts, but they require collateral like your car or house, which can be pulled out in default.
What is a credit card?
A credit card is provided by banks that allow you to borrow funds and make purchases within an approved credit limit. Your credit card may charge interest on your purchases, but it also offers several perks like discounts and cashback, to name a few.
Key features of credit cards
Like personal loans, credit cards also come with essential features that may even work better for you, such as the following:
It has different interest rates. Credit cards have varying interest rates and can even change over time; on one side, it’s good because the costs can be lowered, but it can also go the other way, making monthly payments a bit difficult.
Payments can be flexible. Unlike personal loans, you can pay the minimum fee each time if you don’t have enough funds. However, remember that doing so will incur interest, so paying it all off is better to avoid these charges.
It offers rewards and benefits. As we’ve mentioned earlier, using credit cards also comes with many benefits; with every swipe, you may receive cash back, points, or travel miles, depending on what rewards program your credit card offers.
Choosing between personal loans and credit cards: what works better for me?
Now that you know the two options, you must wonder, “What’s better: a personal loan or a credit card? ”To put it simply, it depends on what you need: do you need funds for home improvement, to pay off a loan, to make a big-time purchase, or any activities along these lines? If you answered “yes” to those above, you’re better off taking a personal loan. With its fixed-term payment, you can pay off your balance without losing much money.
On the other hand, if you’re more into making smaller purchases and can pay these off via the minimum amount, then it’s better to choose a credit card. However, beware of the interest charges since you may be paying more.
Ultimately, choosing to use a credit card or take out a personal loan depends on your needs, circumstances, and financial goals. It’s essential to conduct thorough research to weigh in between the two and consider the factors, ultimately making an informed decision that works best for you.
