Dubai: Some life events require more money than we have on hand. It’s easy to grab a credit card, charge those expenses, and forget about them until it’s time to make a payment.
Although sometimes more convenient, credit cards are not always the best solution. Depending on your credit rating and your needs, a personal loan may be the least expensive option.
If you need a long-term financing option, you can probably get a lower interest rate and possibly a higher limit with a personal loan than with a credit card.
Loans vs credit cards: what’s the difference?
The basic difference between personal loans and credit cards is that personal loans provide a lump sum of money that you repay each month until your balance reaches zero, while credit cards give you a margin of credit and a revolving balance based on your spending.
How personal loans and credit cards are similar
One similarity is that getting a loan or a credit card depends on your creditworthiness and finances. Lenders see if you are used to repaying borrowed money and if you are able to do so in the future.
They use your credit score and your debt-to-income ratio (the percentage of your monthly income that goes towards paying your monthly debt payments) to help you measure this.
Another similarity is that for personal loans and credit cards, the more qualified you are, the more options you have.
Also, personal loans and credit cards are mostly unsecured. You can use them to pay for almost anything you want.
Because you are not securing the loan with a property, such as a house or car, your credit will suffer if you do not make timely payments on the loan or card.
5 cases where a personal loan can be better than a credit card
Here are some cases where a personal loan can be more advantageous than a credit card.
Because events like weddings and other large celebrations aren’t the types of purchases that benefit from rewards programs or the added perks offered by credit cards, you lose nothing by using a personal loan to pay for them.
You can choose the amount of the loan, according to your budget and according to the installments that you can pay each month. Personal loans also allow a longer period to pay off wedding expenses, at a lower interest rate than most credit cards.
2. Health expenditure
Whether you end up with a bill for an emergency visit or have unexpected medical expenses, unless you can pay the full balance immediately, it’s not a good idea to charge it to a credit card. credit.
However, you can often qualify for much higher amounts with a personal loan than many credit cards offer. In fact, some personal loan providers offer an exclusive loan specifically for medical expenses.
3. Business start-up costs
While there are a plethora of small business credit cards designed to reward business purchases, credit cards aren’t ideal for start-up capital.
But if you need to pay your start-up costs with a personal credit card, you can usually transfer that balance to a business credit card once your business is established. This is advisable because you need to separate your personal and business transactions.
4. Debt consolidation
If you’ve incurred huge debt that includes credit card debt, you won’t be able to consolidate everything with another credit card. Even if you get a credit card that offers an introductory interest rate of 0% for balance transfers, you might not get a high enough credit limit.
Using a balance transfer to pay off credit card debt only works if you can pay it all off within the promotional period. Otherwise it’s not worth it, because credit card rates are usually very high. An alternative option for consolidating large debts is the personal loan.
5. Home improvement
While there are home improvement project credit cards that award special cash back and rebate offers for supplies and materials, many only grant these purchases at certain times of the year and charge much higher interest rates.
Home improvement-specific store cards may offer cash back and deferred interest. However, after the promotional period, the rates are very high.
How do I decide if it’s better for me to use a personal loan or a credit card?
A personal loan is a good option when you:
1. Qualify for low rates. Low-rate loans can make monthly payments more affordable and reduce your principal faster.
2. You want to consolidate large debts with high interest rates. Large loan amounts and fixed payments over a few years can help you pay off your debts.
3. Need to finance a large one-time expense. Ideally, the expense will help your finances in the end, such as a home improvement project. Personal loans are not designed to be taken out frequently.
4. Can make monthly payments over the life of the loan. As with credit cards, non-repayment causes your credit score to drop.
Credit cards are a good option when you:
1. Need to finance small expenses. Credit cards are good for regular expenses that you can pay off quickly, especially if your card comes with rewards for regular purchases like groceries.
2. Can pay off your balance in full each month. Experts recommend paying off your balance in full each month so you never pay interest.
3. Qualify for a 0% promotional offer. The cheapest way to pay anything is interest free.
At the end of the line ?
Deciding when to use a personal loan versus a credit card is a bit nuanced. The amount of money you need and how quickly you can repay the money are key factors when deciding which one to use.
Although every situation is different, here is the general rule for choosing between the two options:
Personal loans are generally better for larger expenses that take longer to pay off. Credit cards are generally best for small expenses that can be paid off fairly quickly.
This is because credit cards tend to have higher interest rates than personal loans, so it can be expensive to hold a balance on a card for a long time.
Why would someone take out a personal loan instead of borrowing with a credit card? One of the main reasons is that you have fixed monthly payments, which makes budgeting easier.
If you have a good credit score and stable income, you can usually get a personal loan at a lower interest rate than a credit card.