Both credit card and a personal loan are universally used by people all over the world in order to allow people to buy things that they need with the money that they currently don’t have. The difference between a credit card and a debit card lies in the fact that the first allows you to borrow the money that you will repay on a later date, while the latter uses the money that you have in your account. Every time you use a credit card, you’re taking an additional loan.
Personal loans work in a similar fashion as credit cards, which creates a bit of a confusing situation. After all, you’re lending money either way, so how different can the terms be? Also, with both of these options available, is it possible for a person to say that one is clearly superior to the other? With that in mind and without further ado, here are several factors that will help you understand them better, as well as figure out which of the two is right in your scenario.
How much money do you owe?
The first thing you need to understand is the fact that there’s the difference in the way in which the mechanics of getting a loan vs getting a line of credit (credit card) work. Namely, when you apply for a loan, you get the fixed amount of money, as well as a fixed debt. The reason why this is so significant is due to the fact that it limits your financial flexibility but also gives you a degree of certainty. With a credit card, you get the ability to keep borrowing money for as long as you need it which is more flexible but also a slippery slope. With all this money available, you might be unable to restrain yourself.
As you can see, both of these methods have their pros and cons. If you are uncertain about the amount of money that you’ll need, it’s better to go for the line of credit. After all, you might end up needing a lot less money than you’ve initially anticipated so why would you pay the interest to the money that you don’t need or won’t use? Still, the ability to borrow money on a moment’s notice, without having to undergo a procedure means that you’ll feel inclined to borrow more. In other words, in the same kind of situation, you’re more likely to borrow more with a line of credit than you are with a fixed personal loan.
Smaller purchases
When it comes to the issue of smaller purchases, chances are that you’ll find credit cards to be somewhat more efficient. Why? Well, because of the above-listed features but also the fact that there are some credit cards that offer you 0 per cent APR on these purchases. This means that as long as you are able to pay off the debt before the introductory period expires, you’ll be free of paying the interest rate. While money from a personal loan can be used in any way you want, in this particular scenario, you will end up paying more. Furthermore, personal loans are something you apply for with a specific purpose in mind. It’s not something that you do for a day-to-day purpose.
Larger purchases
On the other hand, when it comes to larger purchases, the situation is mostly the other way around. In a scenario where you need more than $1,000 and you expect that you’ll need more than 15 months to pay it off, chances are that you would be better off with a personal loan. The reason why we brought up the above-listed figure is due to the fact that $1,000 is the minimum amount of money that the majority of lenders will allow you to borrow. Nonetheless, there are a lot of online lenders out there who would allow you to borrow an even smaller amount. Also, the payments that you will make can be weekly or fortnightly, they don’t have to be based on a monthly basis.
Debt consolidation loan
The next issue worth taking into consideration is a scenario in which you decide to actively reduce the interest rate that you pay on a monthly level. This is where the consolidation loan comes in as particularly handy. Sure, by consolidating, you’re not actually reducing the amount of money that you owe, however, you are replacing a myriad of smaller debts with a single major one.
Also, provided that you can get favourable terms, you’ll end up paying a lot less in interest rates (as we’ve already hinted on). As far as the paperwork for such a thing goes, your best bet is to look for a favourable online debt consolidation loan. Sure, if you believe that you can pay off all your loans in as little as 18-21 month, using a credit card for debt consolidation may be a possibility. Needless to say, this is one of those situations where a personal loan is a clear choice over the credit card.
It’s situational
The very last thing you need to take into consideration is the fact that a lot of these things are situational. For instance, we’ve already mentioned scenarios where good credit cards are ideal for small purchases but what if the credit card that you have isn’t a particularly good one? We’ve also mentioned the fact that the majority of lenders won’t issue a personal loan that’s lower than $1,000, nonetheless, some lenders are willing to offer loans that are as low as $300 (especially some online lending platforms).
When we talked about the cons when it comes to the line of credit, we’ve mentioned your potential inability to control yourself with these funds, however, what if you did have a great level of self-control? What if you were in a situation where you really don’t need such a large amount as you’ve anticipated? Needless to say, having a line of credit can allow you to borrow less than you initially expected you’ll need and therefore be able to pivot into having to pay backless. Keep in mind that these context-based decisions might be the ones to determine which of these two options is a better idea.
A purpose-specific loan
One of the things that you need to understand about credit cards is the fact that you can apply for them even when you don’t need them. You see, even if you do have a credit card, you’ll stay debt-free until you actually start making money from it. As long as you have decent credit, applying for one will be a walk in the park. In fact, getting a credit card and being responsible in its use is one of the best and quickest ways to boost your credit score. This means that the responsible use of a credit card may even positively affect your ability to get better loan terms on a later date.
On the other hand, when it comes to personal loans, no one applies for them when there’s no need. In fact, the majority of people won’t apply for a loan unless they have a very good reason to do so. This also means that they have a fixed amount of money in mind, as well as the duration of the repayment process. Needless to say, in this day and age, you can both apply for a credit card and get a loan approved online, which eliminates the need to go to a bank.
Both can be used for business purposes
The last thing you need to bear in mind is the fact that just because it’s called a “personal” loan, this doesn’t mean that it can’t be used for business purposes. In fact, as soon as your loan gets approved, this becomes your personal money. Speaking of which, personal savings and credit are by far the single biggest source of funding for the majority of startups out there.
While a personal loan may be an amazing way of fundraising for your future enterprise, a line of credit can be used in order to fix your cash flow early on. This is due to the above-discussed flexibility that you receive alongside it. Needless to say, both of these problems (initial capital and cash flow) are amongst the biggest challenges that your startup is bound to face. Overall, when it comes to something as unpredictable as the business world, the more options you have available, the merrier.
In conclusion
As you can see, both of these options have their pros and cons. This is why you can’t expect to be able to make a rational decision before you’re introduced with all the specifics. When financial decisions and processes are involved, you are best off doing as much research as possible. We’re not just talking about the research of these two types of loans but about the specific terms and conditions that this lender is offering to you. Only this will you be satisfied with the decision that you’ve made and not regret it later on.
