Given the influence of modern financial technology on our day-to-day lives and the impacts of digitized purchases, personal loans stand shoulder-to-shoulder with credit cards. If you think which one’s better and what you should prefer when you need money, then read on.
Credit cards became popular due to easy approval and convenience in use. For a long time, availing personal loans was a cumbersome process, and it acted as a deterrent for borrowers. But modern fintech companies offer personal loans online, which are approved and disbursed faster than credit cards. And that’s why consumers are opting for personal loans to meet their credit requirements. The danger of high-interest credit card debt is real and best avoided if you can.
Personal Loan vs. Credit Card
Let us first understand how credit cards and personal loans work. A personal loan offers you a lump sum amount of money. Once you receive the money, you will have to pay it back to the lender in equal installments over an agreed repayment period. The interest rate and the EMI you need to pay every month will be mutually decided before the loan disbursal.
Credit cards give you a credit limit which you can use whenever you want. Every month, you will have a payment due date when you need to make a minimum payment. If you do not want to pay more interest, you will have to pay it back in full. The interest is actually calculated on the average daily balance and not your ending balance.
Reasons Why Financing via Credit Cards Should be Avoided:
When it comes to choosing a financially prudent product, we suggest you opt for a personal loan. Financial services institutions are bound to offer you both the facilities. However, it is on you as to which choice you would opt for. This is because it is essential to think long-term in matters of money. You can also consult a financial advisor and seek feedback.
1.Interest Rate: Earlier, people felt credit cards are easier to carry and a convenient mode of availing credit. Many people tend to overlook how it really is one of the most expensive forms of financing. For instance, the interest rates are at least 2-3 times the interest rates offered by personal loans.
The interest rates are conditional unless your credit score is imposing, and it also carries multiple other charges, which can be substantial. In all probability, you should avoid using credit cards and opt for a personal loan.
2.Risking Credit Score
A credit score determines an individual’s sense of responsibility and debt repayment ability. Unpaid and outstanding credit card debts result in a reduction in your credit score and lessens your chances to receive a loan easily the next time you apply for the same. Don’t risk your credit score by taking on credit card debts which you can’t repay on time.
The tenure of a loan should ideally depend on your repayment ability over time. Personal loans are easier to handle because they tend to have a long repayment period. But, credit card loans are short-term in nature. So, their repayment tenure is short-lived. Unless you plan to make your payments as soon as possible, you will start accumulating a high-interest rate.
4.Disruption in the Financial Budgeting
As an individual – financial modeling and budgeting formulate an individual’s financial health and ability to meet the present and forthcoming expenses. Hence, when we use credit cards, we often end up acting negligible and getting caught in a vicious debt trap. This is because, technically, we tend to ignore financial prudence and use the card to pay later. Self-control is essential when it comes to matters of money. If there is a lack of discipline in your lifestyle, you tend to overspend & overpass your limits.
5.Gives you Unwanted Stress
When it comes to the payment of your credit card bills, it is never a smooth sail. This is because even if you are financially able to pay your bills, it adds to your expenses and cuts back on potential investments, giving you nothing but less time to refigure things out all over again. This gives us strain and pressure, taking away your peace of mind.
Personal Loans Help Save Money
As a general rule of thumb, you should opt for a credit card only if you want some credit for short-term expenses, which you can repay in your credit card’s monthly billing cycle. But, if you have a long-term repayment horizon, it is best to opt for a personal loan. I don’t see why you should take on high-interest debt when cheaper and much easier options are easily available.