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When Should I Use a Personal Loan Instead of a Credit Card?

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A personal loan is generally taken when you need large amounts. If you need to borrow a substantial amount or if you want to have access to additional funds, a personal loan or a personal line of credit may prove to be extremely useful.

Credit cards also give you a revolving line of credit and allow you to make large purchases through 0% instalment payment plans.

So, when you do actually want to buy that Apple product you’ve been waiting for, or a new expensive piece of furniture that’s perfect for your home, should you use credit cards or take a personal loan?

We recommend personal loans, and here’s why.

 

Why Are Personal Loans Are Better for Big-Ticket Purchases?

These loans could be a better choice than credit cards for making big investments because:

  • The effective rate of interest on a personal loan is usually lower than that of a card. While effective interest rate for most credit cards hover around the 26% p.a. mark, the effective interest rate for loans in Singapore usually stay between 8% p.a. and 15% p.a.
  • Most banks will allow you to borrow up to four times your monthly income if your annual salary is between S$30,000 and S$120,000.
  • Repayments are easier to manage since the instalments are fixed. Making a minimum payment on a card isn’t enough because you’ll soon rack up a large debt in a short period of time.
  • If you need to borrow more than the credit limit granted to you, you’ll have to pay a large interest to settle your dues. With a personal loan, you can avoid making large interest payments since you know upfront the charges for borrowing a certain amount.
  • You may get up to seven years (even 10 in some cases) to pay off your personal loan. Credit card repayments have to be quick. Otherwise, the interest charges can become unbearable and can make a solid dent on your credit score if you don’t pay them off on time.

 

When Is a Personal Loan Better Than a Credit Card?

  • Debt consolidation: If you have too many overleveraged credit lines active, consolidating them with a zero- or low-interest loan can bring down your interest payments. This will not only reduce your debt burden but also give you a chance to improve your credit score, because you’ll now have to pay a lower interest and worry about one loan only.
  • Buying a home theatre or something big: These loans, unlike revolving lines of credit, are more structured. Knowing the exact amount you need to pay at the end of each month helps you apportion your finances better. Since the rate of interest usually stays fixed throughout the entire tenure and the monthly payments remain the same too, the chance of defaulting is possibly lower than credit cards. Unless you’re paying the full outstanding balance, you’ll always be playing catch-up with your dues.
  • Starting a small business: If you’re planning to start a small, side-business, waiting for a business loan may not sound too attractive. Business loans tend to be more complex and hence banks conduct stringent screenings and background checks to ascertain your financial credibility and risk rating. A personal loan is ideal if your loan amount isn’t too big. If you’re planning to borrow through a credit card, keep the interest payment burden in mind. The bigger the amount, the bigger your risk of defaulting.
  • For unexpected costs: If you have already used up a substantial portion of your credit limit for the month, instead of borrowing over the limit granted to you and paying interest at a steep rate, you can take a private finance loan. It is ideal for meeting unexpected expenses arising from the likes of car repairs and medical emergencies. If you want to pay off your loan quickly and save on interest payments, choose a tenure lower than one year, if available.

 

While credit cards have many intrinsic benefits, there are situations, some of which have been discussed above, where you’re better off without using them. A loan taken in your personal capacity will help you with liquidity without overburdening you with debt if you’re making minimum payments every month.

 

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