Credit cards are exactly what the name implies – a Card that offers money on Credit. In other words, you swipe the card today and make the payment on the card later. The use of a Credit Card is very similar to that of taking out an unsecured Personal Loan at a much higher interest rate. However, there are very few who understand this and know the relevant choice that needs to be made. On the other hand, there are people who have suffered the consequences of using credit cards before realizing the pros and cons of the same.
Unsecured Personal Loans: How They Work?
An unsecured Personal Loan can be obtained and used for any purpose. It could be to go for a vacation, marriage expenses or even for some unplanned medical expenses. With a Personal Loan, you get a specific loan amount at a fixed rate of interest disbursed in your bank account, which is to be paid back in the form of equated monthly instalments (RBI) in a tenure of 1-5 years.
Standard Chartered Personal Loan or other Personal Loan offers can be easily availed by applying online. All you need to do is submit some essential details and documents. Post that the bank representative will get in touch with you for further formalities. After the verification of the documents, the lender may approve or reject your Personal Loan application, depending on the various eligibility factors. If your request is approved, you will have to sign the loan agreement, after which the agreed loan amount will be disbursed into your bank account.
Differences Between an Unsecured Personal Loan and a Credit Card
A Credit Card basically comes with a fixed credit limit which can be used as and when required by you. In other words, you can borrow money at any time provided you are still within the limit of your credit. While on the other hand, in an unsecured Personal Loan, the entire amount is given to you together and the payment is made in prearranged monthly instalments of a fixed amount over a fixed period.
When it comes to making the payment on the Credit Card, it provides you with two options – you either pay off the entire amount that you have spent at the end of the month or by paying a minimum amount, also known as revolving debt. However, it is important to note here that whatever amount remains unpaid, there is an interest that is charged on that amount and the interest keeps getting compounded, till you clear the entire amount due on the card.
So in a Credit Card, you might have borrowed up to a certain amount, which is lesser than your credit limit. Also, you have paid the minimum amount that you needed to pay, which means that you can still borrow some more up to the credit limit. This process practically ensures that you are stuck in the debt all the time. Also, this process doesn’t give you clarity on when you will be debt-free since you will be able to get out of the debt when you finish paying the entire amount due.
On the other hand, when it comes to an unsecured Personal Loan, you know what is the repayment schedule and also you know the amount that has been disbursed to you. This disbursal amount is similar to your credit limit and you cannot use more than this amount. Further, you can’t apply for any more credit till you have followed the application process again.
Both Credit Cards and Personal Loans are forms of unsecured loans since there is no collateral that is provided against them. Hence the interest rates for both Credit Cards and Unsecured Personal Loans are a bit on the higher side compared to the secured loans. However, on Credit Cards, the interests are compounded, which makes the interest rates way higher than the interest rates on unsecured Personal Loans.
Though Credit Cards may be better for smaller purchases, unsecured loans are good for larger purchases. Also, unsecured loans restrict you from overspending, which is highly probable due to the open line of credit that is available on the Credit Card.
Further, when it comes to a Personal Loan, there might be a processing fee, which may or may not be charged by the bank.
Finally, unsecured Personal Loans mainly have a fixed payment term and can be an ideal financial source for any purpose. The interest rate and the loan amount for the unsecured Personal Loan depend on the documents that you provide, your income and credit score (which should be 700 or above). On the other hand, Credit Cards offer you a free line of credit with a limit up to which you can borrow money and then make the payments in instalments, with no fixed payment term and no fixed instalments that need to be paid every month. The interest rates on the Credit Card are compounded and hence turn out to be much higher than the unsecured Personal Loans. Unsecured loans come with a fixed rate of interest, which is decided at the time of the disbursement of the loan.
Given the reasons mentioned above Personal Loans make a better choice for a bigger purchase than a Credit Card.