With the rapidly growing credit market and easy access to digitalization, many individuals who are new to credit started borrowing loans to fulfil their financial needs.
When applying for a loan, you may often get confused about choosing between a personal loan and a credit card. Both offer loans to cover the cash crunch during emergencies. However, your loan choice depends on the purpose, requirements, and repayment capacity.
In this article, let us understand what a personal loan and credit card are and the differences.
What is a Personal Loan?
A personal loan is an unsecured loan to meet sudden financial obligations such as medical emergencies, wedding expenses, purchasing electronic gadgets, home renovation, etc. You can apply for this loan without submitting any assets as security.
With minimum documents for KYC, you can quickly get your loan approved instantly. Since the process is entirely digital, the process is quick and easily accessible.
What is a Credit Card?
Credit cards are also known as Revolving Credit, which means that you have ongoing access to funds as long as you make consistent payments on time. You can use it to make daily purchases either online or in-store. Hence, it can make you lose control over your credit utilization, thereby harming your credit history. These are also unsecured loans; as a result, you need not submit any collateral.
Personal Loans Vs. Credit Cards
|Personal Loan||Credit Card|
|Lends a large amount of money instantly||It Provides ongoing access to cash.|
|Fixed monthly repayments through EMIs||Pay just “Minimum Amount Due (MAD).”|
|Offers loans at low-interest rates||Comparatively high-interest rates|
|Use it to consolidate past debts||Use it to build a credit profile|
|Used chiefly for big purchases||Used for day to day shopping expenses|
Similarities between Personal Loans and Credit Cards
- Both offer loans without any collateral.
- Both do not require much documentation.
- Both consider credit scores to evaluate your creditworthiness.
Importance of Credit Score in Availing a Loan
- A credit is a numerical representation of your credit history. The score depends on payment history, credit defaults, credit mix, etc., and ranges from 300 to 900.
- A good score will help you get loans at lower interest rates quickly.
- A score above 750 will help you get instant loan approvals with minimum documents.
- You can apply for a higher loan amount when you have a good credit score.
- A good score adds value to your credit profile.
- It makes you eligible for any loans.
- A high score makes you a credible borrower who can repay the bills on time.
Tips to Improve your Credit Score
- Check your credit report regularly to know your creditworthiness, and if it has any errors, get it rectified immediately from your respective credit bureau.
- Start clearing your past debts as soon as possible to improve your score.
- You can use short-term personal loans to improve your score.
- Keep your CUR ratio (credit utilization ratio) below 30% of your income.
- Avoid making multiple hard inquiries at a time.
Both personal loans and credit cards help you meet your financial requirements smoothly. However, you need to repay your dues on time to have a good credit history. In both types of loans, a credit score plays an essential role in getting approval for your loan application.