When it comes to managing finances, understanding the right tools at your disposal can make all the difference. Among the most commonly used financial products are personal loans and credit cards. While both can provide the funds you need, they serve distinct purposes and come with unique advantages and disadvantages. In this blog, we will explore the key differences between personal loans vs credit cards, helping you determine which option best aligns with your financial goals.
Whether you’re considering funding a major purchase, consolidating debt, or simply navigating your everyday expenses, understanding the difference between personal loan and credit card is essential for making informed financial decisions.
The table below gives a comparison of personal loan and credit card based on certain parameters:
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Personal Loan vs Credit Card - Key Differences |
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Parameters |
Personal Loan |
Credit Card |
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Usage |
Personal loans are best suited for specific needs, such as large purchases or debt consolidation. |
Credit cards offer greater flexibility for everyday expenses and unplanned purchases. They’re ideal for smaller, ongoing expenses and can also provide rewards, cashback, or benefits like travel insurance. |
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Application Process |
Involves a more formal process, including credit checks and documentation of your income and financial history. The approval process can take a few days to a couple of weeks. |
Credit card applications tend to be quicker and simpler. Many lenders provide instant approval, allowing you to start using your card almost immediately after approval. |
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Interest Rates |
It varies between 10-22% p.a. and is set according to the applicant’s profile. |
Interests on monthly payments are low, between 2-4%. However, APR or the interest charged on default is very high and can touch even 45%. For credit cards, interest is usually calculated as a flat rate. This means that the interest amount is the same for every EMI irrespective of the principal amount. |
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Tenure |
Generally varies between 1-5 years. |
They have shorter repayment tenures. |
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Loan Amount |
It is dependent on one’s credit history and income profile. |
One can spend using credit cards according to the pre-determined credit limit only. For example, let’s say that one has a credit limit of Rs. 50,000. He/she can only spend only up to that amount. If the individual spends Rs. 35,000, then the available limit will be Rs. 15,000 only. |
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Fund Disbursement |
Funds are provided in a lump sum manner. The lender directly transfers the funds to a borrower’s account. |
Funds are directly provided to the merchant or seller. Customers do not receive funds in their bank account. |
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Charges |
Banks levy different fees on personal loans like processing fees, late fees, foreclosure charges, etc. |
Credit cards involve more fees and charges, for example, APR, annual charges, foreign exchange fee, cash withdrawal charges, etc. |
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Personal loans are more apt for big-ticket expenditures. Some of the cases in which one can opt for a personal loan are as follows:
Individuals facing unexpected medical expenses over and above their medical insurance coverage can opt for a personal loan. Even though the rates are high, they are convenient for dealing with medical emergencies.
Individuals having multiple loans can consolidate them by opting for personal loans. It will allow them to group their borrowings under one umbrella and repay within the specified time period.
People getting married or organising a large cultural or religious event can opt for personal loans.
Note: This is not an exhaustive list and just a few examples of how individuals use their personal loans usually.
▶️Also know the “Maximum and Minimum Tenure for Personal Loans”
Here are common uses of credit cards:
Individuals can use their credit cards when they need to buy something within the credit limit. Financing the purchase via easy EMIs can ease the financial burden. These are mostly for small-ticket purchases and daily requirements.
One can get rewards or cashback points by making any purchase or paying bills using credit cards.
Note: This is not an exhaustive list and just a few examples of how individuals use their credit cards usually.
Personal loans and credit cards provide benefits to individuals and allow them to meet their immediate requirements. However, one should check the terms and conditions of lenders before opting for the same.
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