There are often various reasons why you may want to take out a personal loan or a credit card – both options allow you to access credit or funds for various expenses. You may want to pay for emergency expenses, or pay off pressing existing debts. Either way, it’s crucial you know the difference between these two options, so that you can choose what suits you best.
What is a Personal Loan?
A personal loan is an amount of money borrowed at a fixed rate from a bank, online provider or a credit union. This is repaid over a specified period of time, and can be either secured or unsecured.
Normally, a secured personal loan requires some form of collateral in the event that you default, but the most common type of personal loan is unsecured.
Personal loans are very flexible. Some of the most common uses of a personal loan includes the following:
- Medical bills
- Moving expenses
- Appliance purchases
- Home repairs
What is a Credit Card?
Credit cards are a form of revolving credit, allowing individuals to borrow money up to an agreed credit limit. Individuals then repay partial or all of this debt, and then borrow the money again.
With credit cards, individuals are charged an APR (annual percentage rate) which takes into account the interest rate and fees you may need to pay upfront. The average card charges about 18% APR. Credit cards also require you to pay a minimum repayment each month.
Credit cards can be used for a variety of purposes as with a personal loan. However, credit cards are most commonly used for the following:
- Travel expenses
- Restaurants and grocery stores
- Direct debit payments
Personal Loan Vs Credit Card – Which is Right For Me?
Both personal loans and credit cards can impact your credit score. When you pay off the minimum amount and debt from your credit card, this can positively impact your credit profile.
Similarly, when you pay off your personal loan repayments, this can lead to an increase in your credit score. However, when thinking about which is better, there are a few things worth keeping in mind.
Why Personal Loan may be more suitable:
- Personal loans are more ideal for higher borrowing amounts that can be repaid over several years.
- Personal loans provide more structured and regular repayments.
- This type of product often has a lower interest rate than credit cards over an extended period of time.
Why a credit card may be more suitable:
- Credit cards are more suitable for lower borrowing amounts that can be repaid over several months.
- Credit cards offer a revolving line of credit.
- They are suitable for needs that are not urgent, but handy in case of minor emergencies.
Personal Loan Vs Credit Card: Eligibility and further information
- To find out how to check your credit report for free, take a look at moneysavingexpert here.
- Looking formore information on credit building? Check out our post on it here.
- Looking for the best rates? Take a look at the comparisons for rates made by moneysupermarket for personal loans and credit cards.