Capitalism would stagnate without credit. We are granted temporary access to other person’s money which can be used to finance your business and grow. The lender who offers the credit earns interest and the borrower gets leverage and helps in the growth of the economy. There are a lot of lenders in the market and a variety of credit is being offered. The most common form of credit is personal loan and credit cards.
The main parameters that you must consider while choosing between credit card and personal loans are:
Most often people worry about the interest rate that they will be charged and based on that decide which type of credit they must take. But this is not the right parameter to choose which type of credit you want. As paying interest on personal loan is unavoidable but you can however avoid paying interest on your credit card if you clear out the balance for that particular month.
Personal loans carry highest interest rates as they are unsecured and there is no need for you to offer any collateral. This is the main reason why the interest rates are so high, it is to cover the risk that the lender is taking.
Credit Cards on the other hand are also unsecured. But the balance keeps carrying over and if you end up paying just the minimum amount due, you will forever be in debt and end up paying a lot towards the interest alone and it will negatively affect your credit score. Personal loan on the other hand has a fixed tenure in which you have to clear it off hence making it a better choice than the credit card.
Use of the credit:
Credit cards can be used to pay off the monthly bills and make small purchases. Make sure that you repay them in that particular month so that you don’t end up paying interest on it. Take credit cards that offer you cash or travel rewards and make use of those rewards.Personal loan on the other hand is best suited for long term financing such as starting a business, consolidation your credit card or paying off other debts. This is a better option if you are in no place to pay off your balance in the month.
Fixed repayments are set for personal loans hence making it easier to budget. If you take a credit card, there is no fixed repayment, all you have to do is clear out the minimum amount due. This might lead to the loan spilling over to the next month and you might never get to paying it off. But with the personal loan, you can be sure that the loan can be paid off in the tenure that has been agreed upon by you and the lender.
Credit card is easy to avail and all lenders will willingly give you one. But you must use it smartly and make sure that you make repayments each month so that the credit doesn’t spill over to the next month acquiring more interest. Personal loan on the other hand is tenure bound and you will know that by a certain time you would’ve repaid the credit. You can take a personal loan if you require a huge amount of credit. The interest charged will be higher as it is an unsecured type of credit. Check your credit score before approaching the lender and bargain for a lower interest rate.