A personal loan is a type of loan that you can use for your personal needs, such as education expenses, home renovation or travel. You borrow a fixed amount from a bank or lender and repay it in equated monthly instalments. Each instalment includes the borrowed amount and the interest charged by the lender. Personal loans are usually unsecured, which means you do not need to pledge any asset. They also come with fixed tenures, making repayment structured and predictable. This article explains the different purposes of personal loans and comparison with credit cards.
What is Personal Loans?
A personal loan gives you access to funds that you can use for various personal expenses. Unlike loans tied to a specific use, a personal loan is flexible in its use. You receive a lump sum and repay it in fixed instalments, making it suitable for planned or unexpected financial needs.
Purpose of Personal Loans
The following are some purposes of personal loans:
Medical Expenses
You can use a personal loan to cover various expenses such as medical treatments, hospitalisation costs, or emergency care. It helps you arrange funds when urgent medical expenses arise.
Education Costs
A personal loan can support educational expenses such as tuition fees, books, or training courses. This helps you manage academic costs more effectively.
Home Improvements
People often use personal loans for renovation, repair, or interior upgrades. This allows you to improve your home facilities without any financial burden.
Debt Consolidation
A personal loan allows you to combine multiple existing debts into a single repayment structure. This approach often simplifies tracking of dues and managing repayment schedules.
Wedding or Event Planning
If you are arranging a wedding or family event, a personal loan can provide funds. It helps you manage large expenses in a structured manner.
Travel Expenses
You can also use a personal loan to fund travel plans and holidays. It covers bookings, stay, and other related costs when you require a lump sum.
Credit Cards and Their Purpose
A credit card is another way to borrow funds, but its workings are different from a personal loan. The bank gives you a fixed credit limit that you can use for purchases or bill payments. You must repay the borrowed amount within the billing cycle, or you can carry it forward with interest. Credit cards are usually used for daily expenses, online shopping, and smaller urgent needs. They are convenient but require disciplined repayment to avoid extra charges.
Comparison Between Personal Loans and Credit Cards
A personal loan and a credit card both allow you to borrow, but their features differ. Understanding the differences helps you choose an option based on your need and repayment style. Below are some key points of comparison:
Repayment Structure
A personal loan has fixed instalments that you pay every month for a set period. A credit card gives you flexible repayment, but unpaid balances may incur higher charges.
Loan Amount and Limits
In a personal loan, the lender decides the amount based on your income and credit history. A credit card gives you a credit limit that renews when you repay the used amount, which is usually smaller than a loan.
Interest Charges
A personal loan usually comes with fixed interest for the entire repayment period. A credit card often charges higher interest if you do not clear dues fully on time.
Usage
A personal loan can be suitable for large planned expenses like weddings, medical treatment, or home renovation. A credit card is more useful for daily shopping, small bills, and urgent short-term needs.
Tenure
A personal loan has a fixed tenure ranging from months to years. A credit card has no fixed tenure and you may use it continuously within your limit.
Things to Consider While Choosing Between Personal Loans and Credit Cards
While choosing between personal loans and credit cards, consider the following points:
Purpose of Borrowing
Consider the primary reason for borrowing before choosing between a personal loan or credit card. Personal loans are usually suitable for large planned expenses, while credit cards may suit smaller, short-term requirements.
Repayment Capacity
Assess your income and repayment ability before choosing. A personal loan offers fixed instalments, while a credit card requires discipline to avoid carrying balances.
Interest Rates
Compare the interest rates offered on personal loans and credit cards for your repayment duration. Personal loans generally have lower fixed interest, while credit card rates can be higher if balances are carried forward.
Convenience of Application
You can easily apply for a personal loan through a personal loan app, where you can check eligibility, upload documents, and track your application online. A credit card, on the other hand, can be used once your application is approved and the bank issues the card, allowing you to spend within the assigned limit.
Conclusion
A personal loan and a credit card serve different purposes for financial needs. A personal loan helps you manage large expenses with fixed monthly instalments. On the other hand, credit card supports small, frequent, and emergency purchases with a flexible limit. Both options have unique features, repayment terms, and interest charges. The choice depends on the nature of the expense and the repayment capacity of the borrower.
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