Not All Loans Are Created Equal
Stark Differences Between Credit Card Loans and Personal Loans
There are different types of loans. The two most common are credit card loans and personal loans. Credit card loans are simply loans in cash borrowed against your credit card limit. Personal loans are the money that people borrow from financial institutions or banks for any personal purpose. In simple words, both the loan choices are for borrowing some amount of money from financial institutions for personal usage, debt consolidation, investments, or whatever.
What one should opt for: Credit cards or personal loans?
Both these options of loans are quite simple. However, one may be more costly in the long run!
However, the answer for this is not a straightforward one. It simply depends on the situation of a particular person. This means that the situation of a person dictates the types of loan that he or she should choose. The former one, which is credit card loan, is perfect for short term balances that can be paid every month and the latter one, which is personal loan, is meant for long or medium term debt.
Credit cards versus personal loans
Credit cards are considered as the most expensive financing forms, as they come with double digit interest rates. On the due date of your credit card amount payment, you have to pay atleast a minimum monthly amount, which is generally about 1 to 3 per cent of the card balance.
However, if you do not want to accrue interest on this amount, you have to pay your whole balance. And, the interest on the credit card is calculated as per the average daily balance in a month and not on the final balance.
When it comes to credit card debts, it is a revolving debt. This means that the debt on a credit card is limited, the amount of which you are given in the beginning itself. Moreover, the credit amount that you have available for every month relies on your credit card spending and repaying habits.
Furthermore, credit cards are counted as unsecured loans, which mean that they are not supported by collateral. On the other hand, personal loans can either be secured through an asset or can also be unsecured. However, unsecured loans have much more high interest rates as compared to secured loans.
Personal loans, no matter whether they are unsecured or secured, generally have low interest rates as opposed to credit cards, particularly if the borrower has good credit. Moreover, personal loans give you a lump sum amount, unlike credit cards.
For this lump sum amount, consumers have to pay equal amounts for a specified period of time till the loan is entirely paid off, which is typically from 2 to 5 years. The loan payments include the interest as well as the principal amount.
When to get a credit card
- For a short term financing period, as credit cards carry high interest rates
- For small purchases like monthly bills or daily expenses
- When you can pay off the full card balance till the due date, except when you have a credit card with a 0% introductory APR (Annual Percentage Rate)
When to take a personal loan
- For a long term financing period
- For big expenses like child adoption, small business setup, credit card or other debt types consolidation, etc.
- When you cannot pay off your entire balance every month
Thus, credit card loans and personal loans are different in many things, including the debt type, payment amount, as well as the interest rates. If you can pay your entire balance every month, or plan to have the needed cash to cover interest while building business, then opting for a credit card loan might work for you. Getting a personal loan from a bank is a bit more work for you, but if you want 2 to 5 years to pay your whole loan balance, then a personal loan is probably the best option financially.