As the banking and finance sector in the country has grown, it has seen the introduction and vast evolution of the term ‘credit’. The basic concept of credit is to get temporary access to funds for the purpose of managing expenses or making large payments. The concept of credit was created as a win-win situation where borrowers get a get a quick supply of cash, the lenders get fees and interest, and the economy grows due to constant transactions of money.
However, as time passed, the concept of credit evolved into different types and forms of credit. Hence, even though they are same in essence, personal loans and credit cards are not the same. These two, among many other types of credit, differ on the basis of their respective agreements, provisions, and terms. There are countless institutions in the country that lend money to applicants. Hence, many assume that all types of credit are the same and go for the one that offers the most attractive deal. This is what lands them in a tricky financial situation.
Credit cards vs. personal loans
Whenever anyone makes the decision of taking credit, the biggest question that anyone faces is whether they should take a credit card or a personal. In the eyes of many borrowers, both these options offer the same type of credit and hence, they can borrow either one of them. To understand the difference between both of them, you need to read the fine print of both credit types. When a lender offers you either, they will provide you with an agreement document that contains all the terms and conditions along with other details related to the credit. These details include the interest rate, monthly repayment, late fees, underwriting requirements, principal limits, etc. Therein lays the difference that you need to understand. Here are how e ach of them work and why personal loans are a better option:
Credit cards
Credit cards can be secured or unsecured. However, most active credit cards today belong to the latter category. They are often considered a convenient way to make payments for large purchases, either online or at a store. However, what most people forget is credit cards are a revolving form of debt, which means it keeps accumulating until you pay it off and depends on how much you spend. This implies that if you overuse a credit card for purchases and forget to pay your balance in full, your interest is still accrued as per schedule. This further implies that there is no upper limit to your payable amount of credit card debt. For example, your credit card debt of INR 50,000 can rise up even if you do not make any purchases. This is due to the huge interest charges that accumulate over time.
As opposed to personal loans, credits cards do not have a fixed structure of repayment. Lenders that grant you credit cards, which usually are banks, expect you to make time payments but you are not obligated to do so. While this also can be an advantage in case you are going to be a few days late with your payment, banks usually do not communicate with you until you miss multiple payments and the debt is too much to handle. However, they do charge you with late fees.
Alternatively, credit card customers have the option of paying just the interest without paying even a portion of the principal amount borrowed. While that may seem like a great option, the amount of debt you have remains the same even though you are making payments.
Why credit cards are a bad option
- Based on the interest rate of your credit card, your interest charges can accumulate and bury you with debt.
- Credits cards also charge over-the-limit fees, late fees, along with annual fees.
- To qualify for a credit card with lower interest rates, you need to have a good credit history to begin with.
- Credit cards have a maximum limit. However, that may not align with how much you can afford to borrow. Hence, you may be only allowed to borrow less than what you need or more than what you can afford to pay back.
Why personal loans work better
Personal loans have evolved from simply a financial product to a category of them. Within this category, lenders offer a great deal of options that may be similar in many respects but different in some others. Regardless, the primary difference between credit cards and personal loans is the long-term balance. Personal loans do not allow you lifetime access to funds like a credit card does. Any borrower gets a lump sum amount for a fixed period of time. While it may seem restrictive, it is much better than being piled up with credit card debt. The reason for this is that the repayment plan for the loan includes payment for both principal and interest, where the interest remains constant throughout the tenure of the loan. Moreover, the loan amount of personal loans is given to you on the basis of your eligibility, income, etc. This means that there is a higher chance that you will be able to plan your repayment and pay it back successfully. Moreover, the interest rate of personal loans is much better than credit cards.
Personal loans are offered by a wide variety of lenders that offer personal loans either through traditional or online means of applications. Another advantage of personal loans is that you can use the funds for anything you want regardless of need or want.
Points you need to remember
- Personal loans come with lower interest rates, especially compared to credit cards.
- Personal loans are an innovative way to consolidate your entire debt if you can get one at a very low interest rate.
- Lenders that offer personal loans include banks, NBFCs, and online lenders.
For many people, credit cards and personal loans are similar in many ways. And they may be right to some extent. For example, both options allow you to borrow and pay money on time and accrue interest.
However, the difference that makes personal loans better is the management of money. You have to worry about each aspect of credit card borrowings, especially repayment. On the other hand, an instant personal loan app provides a fixed repayment structure that is determined before you get the loan. This makes any borrower aware of what he/she can expect. Hope this blog helps you out.
About The Author
Stephanie Braga
Hi, I am Stephanie Braga. A professional blogger and content community manager on this platform. I love to write and post content on different niche. Contact me, if you need any help related to digital marketing or content marketing.
