Choosing between Instant Personal Loans vs Credit Cards

A distant relative recently needed money to help his family members. Though he did have some savings in form of an emergency fund, he didn’t want to exhaust it all immediately. I offered to help but he wasn’t very comfortable with the idea. So he asked me how quickly could one get a personal loan or should he just go via credit card?

I told him that these days, it’s possible to get a personal loan very quickly and like always, personal loans are comparatively cheaper than credit card interest rates. We will compare both the options in a bit

But before that, be reminded that these days, credit is available quite easily. But you should not get carried away and borrow unnecessarily. Take a loan only of the amount you actually need. And also look at the EMIs and whether it’s possible for you to service them comfortably.

That said, let’s move on.

Instant Personal Loans vs Credit Cards

Instant personal loans and credit cards are financial products with many similarities. Both allow you to borrow money from a lender at a specific interest rate. The borrowed funds need to be repaid with the interest in monthly payments. However, the two options have some key differences.

If you find yourself in need of extra cash, you may be faced with a decision. Should I take out an instant personal loan or apply for a credit card?

Let’s compare the two and go over the advantages and disadvantages of instant personal loans and credit cards to help you make that decision.

Instant Personal Loans

Instant personal loans are the same as regular personal loans but you get them much more quickly than regular ones. An unsecured personal loan is a loan that requires no collateral and can be availed for any purpose.

When you apply for an instant personal loan, you receive a lump sum from your lender. You have a finite time to pay the loan back through monthly instalments. Such loans are offered by banks, non-banking financial companies, credit unions, and online loan apps. Each lender will have its own set of rules, interest rates, and repayment terms.

Most often, instant personal loans are unsecured loans. This means they do not require any collateral. These loans can also be used for various purposes such as medical emergencies, home renovations, or debt consolidation. Lenders disburse the loan within a few days, making it ideal for any urgent expenses. This makes it a convenient and flexible financial product.

Another huge factor in the convenience of an instant personal loan is its eligibility requirements. The criteria to apply for instant loans tend to be more lenient than that of a credit card. While you need to have a monthly income, the credit score requirements are not as stringent. Many loan apps offer 100% online application and approval processes.

Also, I am sure that if you have a good credit score, then you would anyways be constantly bombarded with several pre-approved loan offers.

Credit Cards

I am sure you already know what credit cards are. But just to remind, a credit card is a revolving credit line wherein you get access to funds up to a certain limit. You can use up those funds as and when you make purchases and are then required to pay back the borrowed amount. If you do not pay back the borrowed amount on time, you start to accrue interest on the outstanding balance. These interest rates are often much higher than that of personal loans.

Credit cards can be used for payments in most offline and online stores. They also offer perks in the form of rewards, points, cashback, and air miles. The eligibility criteria for credit cards tend to be stricter than for personal loans. You might need a good credit score to get good interest rates and better terms. However, if you repay your credit card dues in full and in a timely manner, then you may become eligible to increase the credit limit.

Just a reminder that you should never just pay MAD of credit card and think it’s enough.

Which Should You Choose?

Instant personal loans and credit cards each have their merits. While instant loans offer lower interest rates, it is a one-time loan. If you need to borrow money again, you need to go through the application process again. Credit cards offer more regular access to funds. Moreover, you only pay interest if you accrue a balance but the interest rates are higher.

Instant loans have longer tenures and allow you to repay the amount over a longer period of time. Credit cards on the other hand have smaller borrowing amounts and shorter tenures but are better if you need cash for multiple expenses. Instant loans are better if you need to consolidate your debt because you benefit from a low-interest rate.

Put simply, the advantages of instant loans are that you can borrow a larger amount of money in one go at a lower interest rate and have a longer time to repay it. The advantage of credit cards is the consistent access to funds and other perks in the form of rewards and air miles.

In fact, there is a case for taking a personal loan to clear credit card dues as well in many situations.

So how do you go about choosing between the 2 options?

Try to answer a few questions like the below ones and you will be able to decide easily:

  • How urgent is your requirement?
  • How much money do you need?
  • How much interest rate are you being charged?
  • What is the processing fee?
  • Are there any prepayment charges?

Eventually, your choice between the two depends on what your needs are. If you wish to use credit for different online stores and are confident you will be able to pay your credit card bills in a timely manner, credit cards will work best for you. If you wish to start your credit journey with something more low-risk or need a lump sum of money, apply for an instant loan.

In any case, remember not to take loans or credit card debt unnecessarily and for discretionary spendings. Assuming you genuinely need money for something important, the choice between a credit card and instant personal loans would depend on your cashflow, how quickly you need money and the amount required. A credit card is better for smaller amounts that you can easily repay in weeks. But if the amount required is large and you can only repay it over the next few months, then taking an instant personal loan is better.

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