Credit Card vs. Personal Loan: What are the advantages and disadvantages? Which option is the smart choice when you're short on money?

Both credit cards and personal loans are considered companions in difficult times because they provide quick access to funds. However, it's crucial to understand which option is more beneficial for you in an emergency. Learn about interest rates, EMIs, grace periods, and the full range of pros and cons.

When faced with a sudden need for money, two options often come to mind: a credit card and a personal loan. Both are unsecured loans, meaning they don't require any guarantees. This is why they're considered companions in difficult times. But the question is, in what circumstances is a credit card appropriate, and when is a personal loan wiser? This is crucial to understand, as the wrong choice can lead to significant difficulties. Learn more about it here:

Credit Cards: The Facility to Take Loans Again

The biggest advantage of credit cards is that they offer a reusable limit. Meaning, you spend money on the card, pay the bill, and the same limit becomes available to you again. This is not the case with personal loans. Once you've repaid the loan, you have to reapply. Your CIBIL score, income, and profile are then checked again. Repeated personal loan borrowings can also negatively impact your credit score.

Personal Loans Don't Offer Grace Period

Credit cards are also popular because they offer a grace period. If you repay the entire bill within this stipulated time, you don't have to pay any interest. However, once the grace period ends, the interest rate increases significantly. However, personal loans don't offer this option. As soon as you take out the loan, you have to start paying EMIs plus interest from the next month.

You don't need to be a customer of the bank to get a credit card.

You don't need to have an account with that bank to get a credit card. However, for a personal loan, you must provide a bank account, salary slip, income proof, and KYC documents. The credit card process is generally simpler and faster.

Rewards and Cashback: A Big Plus Point of Credit Cards

You earn benefits like reward points, cashback, discounts, and gift vouchers when you spend with a credit card. Personal loans offer no such benefits; there's only the loan and its EMIs.

Loan closing rules are also different.

You can repay your credit card balance in full during the grace period or convert it into EMIs. However, EMI conversions may incur processing fees, GST, and prepayment charges. Most banks charge a prepayment penalty if you want to close the loan before the due date.

When to Choose Which Option?

If you need a small amount of money for a short period, a credit card is a better option. However, if the amount is large and repaying it immediately is difficult, a personal loan would be wiser.

If you borrow a large amount using a credit card and fail to repay it on time, the high interest rate can trap you in debt. On the other hand, personal loans offer a longer tenure, lower EMIs, and easier repayment.

FAQs
Q1. Is it safe to take a loan with a credit card?
Yes, if you repay the loan in full within the grace period, it is a safe and affordable option.

Q2. Why is the interest rate lower on a personal loan?
Because it has fixed EMIs and a longer tenure, which reduces risk.

Q3. Does taking out personal loans repeatedly have any drawbacks?
Yes, it can lower your CIBIL score and make future loans more expensive.

Q4. What should you choose if you need immediate funds in an emergency?
It's better to choose a credit card for small amounts and a personal loan for larger amounts.