Instant personal loans and credit cards are financial products with many similarities. Both allow you to borrow money from a lender at a specific interest rate. The borrowed funds need to be repaid with the interest in monthly payments. However, the two options have some key differences.
If you find yourself in need of extra cash, you may be faced with a decision. Should I take out an instant personal loan or apply for a credit card? In this quick guide, we go over the advantages and disadvantages of instant personal loans and credit cards to help you make that decision.
Instant Personal Loans
When you apply for an instant personal loan, you receive a lump sum from your lender. You have a finite time to pay the loan back through monthly installments. Such loans are offered by banks, non-banking financial companies, credit unions, and online loan apps. Each lender will have its own set of rules, interest rates, and repayment terms.
Most often, instant personal loans are unsecured loans. This means they do not require any collateral. These loans can also be used for a variety of purposes such as medical emergencies, home renovations, or debt consolidation. Lenders disburse the loan within a few days, making it ideal for any urgent expenses. This makes it a convenient and flexible financial product.
Another huge factor in the convenience of an instant personal loan is its eligibility requirements. The criteria to apply for instant loans tend to be more lenient than that of a credit card. While you need to have a monthly income, the credit score requirements are not as stringent. Many loan apps also offer 100% online application and approval processes.
A credit card is a revolving credit form wherein you get access to funds up to a certain limit. You can use up those funds as and when you make purchases and are then required to pay back the borrowed amount. If you do not pay back the borrowed amount on time, you start to accrue interest on the outstanding balance. These interest rates are often higher than that of personal loans.
Credit cards can be used for payments in most offline and online stores. They also offer perks in the form of rewards, points, cashback, and air miles. The eligibility criteria for credit cards tend to be stricter than for personal loans. You might need a good credit score to get good interest rates and better terms. However, if you repay your balances in a timely manner, you may become eligible to increase the credit limit.
Which Should You Choose?
Instant personal loans and credit cards each have their merits. While instant loans offer lower interest rates, they are one-time loans. If you need to borrow money again, you need to go through the application process again. Credit cards offer more regular access to funds. Moreover, you only pay interest if you accrue a balance, but the interest rates are higher.
Instant loans have longer tenures and allow you to repay the amount over a longer period of time. Credit cards on the other hand have smaller borrowing amounts and shorter tenures but are better if you need cash for multiple expenses. Instant loans are better if you need to consolidate your debt because you benefit from a low-interest rate.
Put simply, the advantages of instant loans are that you can borrow a larger amount of money in one go at a lower interest rate and have a longer time to repay it. The advantage of credit cards is the consistent access to funds and other perks in the form of rewards and air miles.
Your choice between the two depends on what your needs are. If you wish to use credit for different online stores and are confident you will be able to pay your credit card bills in a timely manner, credit cards will work best for you. If you wish to start your credit journey with something more low-risk or need a lump sum of money, apply for an instant loan.