When you need to borrow extra money in order to consolidate debt or overcome your financial burden, options include two popular options: credit cards, and personal loans. But how do you know which option is right for you?
Both personal loans and credit cards can provide you the money, but each has its own benefits and drawbacks. Before you choose any of these options to reduce your financial burden, here is what you first need to know.
What Is A Personal Loan?
A personal loan is an unsecured loan that enables you to borrow money for a wide range of reasons including emergency expense, financing a dream wedding, home renovation, and even for debt consolidation. You can avail a personal loan from a bank or online personal loan lender. Personal loan eligibility & personal loan interest rate may vary from the lender to lender.
A personal loan works in the same way that student, mortgage, & auto loans works. You apply for the desired loan amount and the personal loan lender utilize your credit history in order to determine whether you qualify & also at what personal loan interest rate. In a general manner, the better your credit score is, the lower your personal loan interest rate will be. And then, you will need to repay the entire loan amount through equated monthly installments.
One of the major personal loan benefits is that they are an unsecured loan. Thus, you don’t need to submit any collateral or guarantor.
Personal loans are a good option to choose if you:
- Need cash for large expenses
- Want to clear off high-interest debts
- Have a good or excellent credit score
Personal Loan Pros
- A personal loan can be used for almost anything
- Majority of lenders disburse funds quickly
- No need to submit any collateral
- Flexible borrowing terms
Personal Loan Cons
- High personal loan interest rates for the borrower with a poor credit score.
- Most banks or personal loan lenders charge a high processing fee
- Majority of banks have a minimum income criteria
- Credit score must be good or excellent to be eligible
- Changes in the repayment period are typically not allowed
What Is A Credit Card?
A credit card enables you to borrow money from a bank in order to make purchases — whether you’re purchasing daily needs or a round trip air ticket. As long as you pay back the full money you have borrowed within a specific period of time, you don’t need to pay any extra money. However, if you fail to pay back the outstanding balance of your credit card in that specific time period, you’ll have to pay high interest costs, since credit cards generally have a high rate of interest. Carrying a high balance can also significantly lower your credit score.
With risks of carrying a high balance & higher interest rate, credit cards are considered to be the best option for short-term purchases & financing only like utility bills, daily expenses, shopping, etc.
Credit cards are a good option to choose if you:
- Need quick cash for smaller expenses
- Can easily pay the balance in full each month
- Have an average credit score
Credit Card Pros
- More convenient than carrying cash
- Widely accepted
- Responsible use will improve your credit score
Credit Card Cons
- Dangerous for those who lack financial discipline
- Missing payments or exceeding the credit limit can negatively affect your credit score
Some Final Thoughts
While everyone’s situation may be different, personal loans are generally ideal for larger expenses which you can easily repay over the long period of time through the equated monthly installments. And credit cards are generally ideal for smaller purchases that can be cleared off quickly within a month of its purchase only. That’s because credit cards hold a high rate of interest than in the comparison of personal loans, so carrying a balance on a credit card for a long period of time can burn a hole in your pocket.
So it’s important to select the correct option for reducing your financial burden, depending on your needs and requirements.
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