Credit cards vs. personal loans: Which is best?

UAE Money

When it comes to borrowing money that’s not secured against an asset, there are two clear options – taking out a personal loan or using your credit card. But which is the most beneficial in the long run for your finances?

Unexpected expenses can crop up and both options offer you quick access to the money you need. However, with either option, you should plan to pay the money you borrow back plus interest. While financial experts usually recommend an emergency fund for a rainy day, many people don’t have the luxury of one. As a result, credit cards and personal loans often step in as a quick fix.

Choosing between the two can be tricky because they both come with pros and cons and both suit different types of borrowers.

People use credit cards normally for day-to-day purchases. Most of the value of a credit card is in the convenience of it; you never see your bank balance go down, and you have easy access to it. But it can be easy to fall into the trap of overspending each month and then struggle with the high interest rates added onto your purchases. Credit cards can offer a more flexible form of payment, as you can choose how much you wish to pay back each month.

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What’s more, if things get really bad, dealing with credit card debt can become easier if you use a balance transfer – with little to no interest rates. That way you can avoid the high interest rates and instead you can focus on paying off the debt. However, if you find yourself using a balance transfer to try and get out of debt, then maybe a personal loan might have been the best route in the first place.

If you’re borrowing a relatively small amount, credit cards are usually the go-to option. Credit cards usually give you an interest-free period of around a month, which can give you enough time to pay off the amount before interest is added. The periods of 0% interest make credit cards a better choice for smaller borrowing.

However, if you choose a personal loan for a small amount of money, you’re required to pay interest from day one. Using a credit card as a loan doesn’t require much documentation, so it usually becomes the fastest option to obtain unsecured credit. A credit card’s ease of use, and the ability to use it anywhere in the world at any time, often leaves the this as the number-one option for quick credit. What’s more, some credit cards can appear appealing to customers with cashback, rewards, air miles or discounts when shopping.

However, using a credit card may not be the most sensible option. Overdue bills tend to have high interest rates and could eventually lead to a poor credit score, affecting you financially later. Personal loans, despite being more hassle to set up, could be better for your finances if you envision yourself being unable to pay back credit card bills quickly.

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For anyone looking for a large lump sum, a personal loan seems like the wisest decision. Personal loans can help you manage several of your debts by consolidating them into one monthly payment. As the loan comes in monthly instalments, the interest rate and length of loan is fixed so it could possibly lower the other payments you have combined. What’s more, the finance limits on personal loans are typically higher than those on credit cards, so depending on how much you want to borrow, a personal loan may be the better option.

And, because of the fixed monthly payments, personal loans remove the temptation of only paying off the minimum amount – a tactic often used when paying off credit cards.

However, it’s not uncommon for many people to be rejected from when applying for a loan. If you’re applying for a loan that will take you above the limit for your debt-burden ratio, you’ll certainly be rejected. All banks in Dubai use this tool to ensure that clients are not burdening themselves by over-borrowing. And it’s important to note that, although personal loans offer lower interest rates, you need to ensure that you still have a sensible payment plan.

Ultimately, a decision to use credit cards should be based on whether you have the cash flow to repay the amount quickly and whether you are likely to keep spending and go further in to debt. Some personal loans will allow you to make extra payments to help you pay off your loan more quickly and save you interest. But with either decision, you need to be disciplined in your regular payments with the end goal of becoming debt-free as soon as possible.

If you think having a credit card suits your finances better, then click the button below to compare the right credit card for you!

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