Personal loans and credit cards are similar in the aspect that they are both lines of credit that you have to repay with some form of additional interest. Both products come with their own unique set of advantages.
Read below to see which product would suit you best based on requirements and budget.
Scope of use:
Both personal loans and credit cards come with a varied scope of use. While credit cards are more geared towards catering to everyday expenses and the occasional big-ticket retail expense, personal loans are more towards handling bigger expenses such as wedding expenses, vacations, remodelling the interiors of your home etc.
Both products do come with limitations. While credit cards deal with the credit limit, loans can give you a maximum amount of RM150,000 though there are personal loans offering much higher loan amounts. In both cases, your income level is a deciding factor in the amount you can borrow. Usually personal loans offer a higher upper limit than credit cards due to the longer tenures involved.
Another important aspect is how long you wish the repayment period would be. Personal loans can offer you longer tenures of up to 5 years whereas credit cards don’t have a fixed tenure as such. The balance amount can be chipped away one minimum monthly payment at a time.
Personal loans do require you to make a monthly payment which is decided upon at the time of acquiring the loan. Unfortunately you don’t have the option of making minimum payments on this. but choosing a longer tenure can result in a lower instalment amount. But this would result in you paying a lot more on interest as compared to a loan with a shorter tenure but higher instalment amount.
Personal loans do offer you the chance to close your loan early in which case, depending on the loan, you may or may not be charged with an early settlement fee.
Both products have a relatively fast approval time. The applications are quite straightforward and hassle-free and provided you meet all the eligibility criteria, they also have similar disbursal or issuance times making it ideal to meet any pressing need.
The single-most deciding factor for rating affordability is the interest rate involved. Personal loans come with an effective interest rate going as high as 24% p.a. whereas credit cards charge an interest rate of around 15% to 18% p.a. on retail transactions and 18% p.a. on cash advances. While personal loans do have a higher interest rate, credit card rates are compounded annually.
Credit cards do offer incentives such as cashback or air miles or reward points but to make the most out of these perks, you need to spend it on the right category, meet the specific spend criteria (if any) and most importantly, pay off your monthly dues in full to avoid interest charges which could eat into your perks.
Besides, most privileges offered by a card come with caps which means a cashback card would offer a maximum of around RM50. There are cards that do not have any limits on the cashback you earn, but the rate at which it earns the cashback is 0.2% making it a less than ideal way to save on your expenses.
Credit cards and personal loans have their own set of advantages and disadvantages. If you’re looking at a loan amount which is relatively small and can easily be paid off in a couple of months, a credit card might come in handy, but larger expenses are better handed with the help of a personal loan.
Q. What is the difference between a personal loan and a credit card?
A. Both personal loans and credit cards are financial products offered by banks. A personal loan is generally used for big ticket purchases or to arrange for immediate financing. Credit cards, on the other hand, is an alternative to cash, that lets you to purchase something even if you have zero account balance. You also get a host of other benefits with credit cards, including redeemable rewards, cashback, Visa/Mastercard privileges, and more. While personal loans come with a fixed tenure, credit cards are a type of revolving credit. As far as personal loans are concerned, you can only take a fixed amount of funds from the bank. On the other hand, credit cards come with a credit limit. You can only use funds up to the maximum assigned credit limit of your card.
Q. Can a personal loan be used to pay off a credit card?
A. If you don’t use your credit card smartly, you can end up in high debt. One of the easiest ways to pay off debt is by taking a personal loan. Since personal loans are generally unsecured loans, they require less documentation and can be processed easily. You can also take a large amount of personal loan to pay off your credit card debt. The remaining can be used for any other financial commitments or as savings.
Q. Should I opt for a personal loan or a credit card?
A. You can opt for both. However, personal loans are generally taken in cases of emergency. In the end, it depends what you are looking for. If you have high debts, you can opt for a personal loan to consolidate your debts.
For those who don’t have a credit history, one of the easiest ways to establish one is by applying for a credit card. Not only is the process simple and hassle-free, but you also earn rewards, cashback, discounts, deals, and many other privileges when you use your card.
Q. Is credit card a type of loan?
A. Credit cards work differently from loans. A credit card comes with a credit limit facility. You can use how much amount you want up to the maximum assigned credit limit of your card. However, it comes with a high-interest rate, unlike loans.
Most cards also offer a 20-day grace period during which you won’t be charged any interest. Once the 20 days are over, all purchases will be charged the normal retail interest rate. In short, it would be a good idea not to use your card as a loan but as a card. Utilise your card for earning rewards and other privileges.
Q. Does personal loan debt look better than credit card debt?
A. Since personal loans come at lesser interest rates when compared to credit card debt, they look relatively much better than the latter. However, you need to make your monthly instalments on time and repay your debt during the tenure of the loan.
Q. Does applying for a loan affect your credit score?
A. Yes. Both existing and new personal loans can affect your credit score if you default your payments. When you make your payments on time, you successfully build credit. Once you successfully repay the whole amount, the bank will know that you have the ability to make payments on time and will approve your loans in future as well. Applying for a personal loan is also a good way to establish a credit history.
Q. What is the best way to pay off credit card debt? Will a personal loan help?
A. There are many ways to pay your credit card debt. You can minimise your expenses and control your spends by lowering your card's credit limit. You can also transfer the outstanding balance of your credit card to a card that offers 0% or a low balance transfer rate. One of the easiest ways is by taking a personal loan to consolidate your credit card debt. Not only are personal loans available at lower interest rates, but you can also opt for a loan amount higher than your debt and use the excess for other requirements.
Q. Can you transfer a personal loan to a credit card?
A. Not all banks allow personal debt to be transferred to credit cards. However, if you the bank permits you to do so, you can transfer the loan to a 0% balance transfer credit card to secure savings. But ensure that you pay off the loan within the 0% promotional period. If you don't do so, you will have to pay the retail interest rate to repay the loan once the offer is over.