Personal loans cost less money than credit cards, as they charge lower interest rates. Still, if you pay off the whole credit card balance within the interest-free period or you have qualified for a 0% credit card, they will save you more money.
What are personal loans?
Personal loans are unsecured loans. They are known by this name because they are not subject to collateral. Personal loans can be small and large depending on your financial needs. When they offer a paltry sum, they are required to be paid back in one fell swoop. The repayment term of small personal loans does not last beyond a month. These loans are also called small emergency loans, quick loans or instant loans.
When you borrow a large sum of money, you will be required to settle the debt in fixed monthly instalments. The repayment length of large unsecured loans is between 6 months and five years depending on the borrowed amount and your creditworthiness.
How do personal loans work?
You borrow a lump sum of money you repay over a period of months. However, if the loan amount is less than €1,000, you will be required to discharge the debt at one shot, typically the day after your payday.
Interest rates for personal loans start from 10.9% to 24.9%, provided your overall credit profile is excellent. If your credit rating is less than perfect, interest rates start from 24.9% to 45%. You must bear in mind that short-term emergency loans are even more expensive as they involve a high risk of default and are normally aimed at subprime borrowers.
What are credit cards?
Credit cards come with a limited balance that you can withdraw as and when you need. On no account will you be able to borrow more than the available limit. Unlike personal loans, credit cards are revolving credit. It means you are eligible to use funds as soon as you pay them back. You do not need to apply for a credit card every time you need money.
How do credit cards work?
You will need to submit an application to a credit card provider. They will assess your creditworthiness to decide on the limit. Once you have been issued a credit card, you can use it to make purchases as long as you have enough limit.
When you make a transaction through a credit card, your credit card company pays for it. You are obligated to pay back the money when the credit card bill is generated. You will have an interest-free period, which is called a grace period. If you pay off the whole balance within the interest-free period, you do not have to pay interest.
If you do not, credit cards charge interest by the day. Interest rates range between 35% and 49%. Subprime borrowers struggle to qualify for credit cards. Most of the credit card companies want you to have a good credit rating.
Here is a credit card and personal loan comparison
| Aspects | Personal loans | Credit cards |
| Interest rates | Between 10% and 45% | Between 35% and 49% |
| Repayment structure | Fixed monthly instalments | Minimum payment options |
| Processing time | 1 to 5 days | A day or 2 |
| Fees | No upfront fees | 1% to 3% |
| Risk | Moderate | High |
Small emergency loans are way more expensive than credit cards
When you come across small emergencies, you can either consider small unsecured loans or credit cards. Instant loans charge very high interest rates. Though the full amount is to be paid back on the day after your payday, interest will be calculated based on the APR. The APR for small emergency loans can go up to 500%. There is no doubt that these loans are way more dangerous than credit cards.
Credit cards also require you to discharge the full debt at one shot, but they come with a grace period. If you manage to settle the full balance within that period, you can avoid paying interest. If you have a 0% credit card, you do not need to pay interest at all, provided you do not default.
Credit cards are expensive when you manage them irresponsibly
If your credit score is stellar and you need a large amount of money, personal loans will be the best bet. They charge lower interest rates than emergency loans, and the good thing is that they are paid back over an extended period. Since monthly payments are predictable, you can easily manage them.
Though credit cards seem to be more manageable as you can avoid paying interest, it is not always possible to have enough money to pay off the balance within the grace period. If you try to make the minimum payment, interest will keep accruing on the outstanding balance. Bear in mind that interest is charged by the day. It will increase your credit card debt.
You might think of consolidating credit card debt, but it requires a good credit rating. No lender will issue a balance transfer card if your credit score is already damaged.
Getting qualified for credit cards is tougher
When you need a small amount of money, you can get easily approved for small personal loans. Despite a poor credit rating, you can have a small loan approved to cover unexpected expenses.
But qualifying for credit cards with a bad credit rating is not possible. No lender will approve your credit card request if your credit rating is not stellar. Personal loans are more flexible than credit cards as they target borrowers across all credit score ranges.
The final word
Personal loans are less expensive compared to credit cards, but the latter follow strict approval criteria. You must have a good credit rating to apply for a credit card. However, personal loans can be easily secured by subprime borrowers.
Credit cards are more affordable only when you pay off the full balance within the grace period or your credit card is interest-free. If you pay off only the minimum balance, you will have to pay interest on the unpaid amount. You will find it more expensive than personal loans. There is even a risk of falling into debt.
