Personal Loan vs. Credit Card: Which Is Best For You?

Nov 20, 2023
 |  1 min read

When it comes to managing your finances and covering unexpected expenses, two standard options are personal loans and credit cards. A personal loan is a fund you can borrow from banks to use for a variety of purposes. Whereas credit cards are like your financial backup, always ready for action. They offer a revolving line of credit, letting you swipe for purchases and pay later.

However, with excellent spending power comes great responsibility. Understanding the key differences between personal loans and credit cards can help you make a well-researched decision. Let us know the world of personal loans and credit cards and explore the best choice for your needs.

Key Differences Between Personal Loans and Credit Cards

Personal loans and credit cards differ in several significant ways. A personal loan is a lump sum of money from a bank, credit union, or an online lender, while a credit card provides a revolving credit line that lets you make purchases up to a certain amount.

Interest Rates: Personal loans usually offer lower interest rates than most credit cards. With a fixed interest rate, your monthly payments are predictable, making it easier to budget for loan repayment. On the other hand, credit cards often have higher variable interest rates, which can increase your debt quickly if you carry a balance.

Loan Term: Personal loans come with fixed loan terms, ranging from one to seven years. This structure allows you to plan your repayment over a specific period. Credit cards have no fixed term but require minimum monthly payments, making it easy to carry a balance for an extended period.

Credit Limit: Credit cards are set based on your creditworthiness and the issuer's decision. You can continue using your card up to this limit if you make timely payments. Personal loans, however, provide you with a one-time lump sum, and you can only borrow more if you apply for another loan.

Which Is Best? Personal Loan vs Credit Card

Whether you should take a personal loan or a credit card can be decided based on your financial needs and goals. Do personal loans affect your credit score? Yes, they do. Let us understand how these personal loans and credit cards work better first.

Personal Loan: A personal loan is an excellent choice when you have a specific financial goal, such as consolidating high-interest debt, funding a home improvement project, or covering medical expenses. The fixed interest rate and predictable monthly payments make it easier to budget your expenses, and you will have a clear repayment timeline. Personal loans can be beneficial for situations that require a more considerable amount of money, such as taking a loan for emergencies in Delhi.

Credit Card: Credit cards are more suitable for day-to-day expenses, providing flexibility and convenience. They are also valuable for building or rebuilding your credit history. Using a credit card smartly and responsibly can help boost your credit score. However, paying your bills timely is crucial to avoid high-interest debt. Credit cards are a great choice when you need a credit line for smaller purchases and everyday spending, making them an excellent credit line app.

So, before pondering on the question, which is best? Personal Loan vs. Credit Card: evaluate your financial situation, considering factors like loan amount, repayment terms, and spending habits, to determine which option aligns best with your specific financial goals.

Do Personal Loans Affect Your Credit Score?

If you are wondering if personal loans affect your credit score, then yes, personal loans can impact your credit score. When lenders review the credit before approving your loan, the score may decrease for some time. However, your score can improve if you make timely payments on your loan. This is because responsible loan management demonstrates your ability to handle debt effectively.

Personal loans can positively influence your credit score, a significant part of your credit mix. Credit scoring models appreciate a diverse credit portfolio, including instalment loans (like personal loans) and revolving credit (hello, credit cards) as a sign of responsible financial management.

On the other hand, credit cards play their part in the credit score symphony. The utilisation rate, or the ratio of your credit card balances to the credit limit, comes into the spotlight here, influencing your credit score. Ultimately, the decision between a personal loan and a credit card hinges on your financial objectives. If navigating the credit card realm differs from your current goal, mPokket steps in with swift cash loans to bolster your credit profile. It's an optimal choice if a credit card is outside your immediate plans. Whether seeking a personal loan in Delhi or a loan for emergency and handling an unexpected financial curveball, understanding the distinctions between personal loans and credit cards empowers you to make informed financial decisions.

Gaurav Jalan

Gaurav Jalan is the Founder and CEO of mPokket, a digital lending platform serving underserved Indian youth. He leverages technology and experience to deliver cost-effective credit to marginalized populations. In his role, he provides strategic direction and oversees execution to fulfill mPokket's mission.