What are the differences between personal loans and credit cards?

Is getting a credit card better than a personal loan?

If you need a loan, the two most convenient options are credit cards and personal loans. But don’t think that these two are interchangeable. They have very different features that can be better for you based on your financial needs.

Keep reading to learn what are personal loans and credit cards, compare their differences, and see which one is a better choice.

Credit card vs personal loan: Similarities and differences

We know credit cards let people buy things and pay for them later. Credit cards are a type of revolving credit where the borrower has a set credit limit that they can use.

Meanwhile, a personal loan is an unsecured installment loan where the borrower receives the cash in a lump sum. It is paid with fixed interest rates over a specified period.

You can use both for a wide range of purposes, so they are useful for cash flow management.

Personal loan and credit card differences revolve around five key elements:

Loan form

One key difference between these two types of debt is how the loan is given to you. For credit cards, you do not get cash but a line of credit that you can spend. When you receive a credit card, the bank informs you of your credit limit. You can continue using your credit card for your purchases as long as you don’t go over the credit limit or cancel it.

For personal loans, you get cash in a lump sum, which you can then use for whatever purpose you deem necessary. Unlike credit cards, personal loans are a one-time setup. You receive the loaned amount once and then you pay it for a specified period.

Loaned amount

Credit card providers assess your financial capacity and decide how much credit limit to assign to you. You can only spend that much on your credit card, or you’ll be charged for going over the limit.

You may request an increase in credit limit after establishing your financial capability, but that remains subject to assessment.

In contrast, when you apply for a personal loan, you indicate how much you want to borrow, which means that you can borrow larger amounts than your credit limit. Depending on the bank’s evaluation, they may agree to loan you a lower or higher amount, which can be up to PHP 2 million.

So, one good reason to get a personal loan instead of a credit card is if you need money for a big-ticket expense.

Repayment terms

Both personal loans and credit cards require monthly payments. However, with credit cards, this amount changes depending on your purchases within the cut-off period.

In contrast, the monthly amortization for personal loans stays generally the same until you pay off the entire amount. The amount you pay may change only if you incur additional fees, such as late payment fees.

One difference between personal loans vs credit cards is that you must pay your credit card balance in full to avoid incurring additional interest, while for personal loans, if you decide to pay it in full before the end of the loan period, you’ll need to pay a pre-termination fee.

Accumulation of interest

With credit cards, whatever you use up in your line of credit, you need to pay at the end of your billing cycle. Any amount left unpaid will be charged with interest. The interest can quickly accumulate, and in addition, potentially increase at the bank’s discretion, so you may end up paying more for your purchases. If you’re not careful, a credit card may cost you more in the long run.

Meanwhile, an installment credit may be more manageable since you can only borrow a fixed amount that needs to be repaid at a fixed rate and period. Thus, you are less likely to accumulate more debt than you can handle.

Interest rate

A personal loan’s interest rate is fixed but it is determined by the loan tenor (length of time). Typically, the shorter your repayment term is, the higher the interest rate. It can range from 1.25% to 1.75%. However, the agreed interest rate is fixed until you pay off the loan.

For credit cards, the maximum interest rate set by the Bangko Sentral ng Pilipinas is 3% per month as of 2023. However, this interest rate is only applied to your unpaid balance every month. So, if you don’t pay your balance in full every month, a purchase from two months ago may become more expensive than you think.

Fees

Both personal loans and credit cards come with various fees. Some of these fees are automatic, while others are charged as a form of penalty.

For personal loans, you can expect the following fees:

• Disbursement Fee - applicable upon loan disbursement
• Documentary Stamp Tax - applicable for loan amounts above PHP 250,000
• Late Payment Fee - applicable for missed payments
• Pre-termination Fee - applicable for early repayment of the loan
  

The first two are required but the last two fees can be avoided by paying on time and completing your loan tenor.

For credit cards, expect these fees:

• Annual fees – once-a-year charge to be allowed to use a credit card
• Late payment fee – a penalty for failing to pay on or before your card’s due date
• Overlimit fee – a penalty for charging beyond your credit limit
• Card replacement fee – applicable when you misplace your credit card
• Cash advance fee – applicable when you avail your card’s cash advance feature
• Foreign currency transaction fee – applicable whenever you charge in a foreign currency
• Pre-termination fee – charged when you want to make an advance payment to cancel an installment plan
• Balance transfer fee – charged if you want to transfer your current balance to a different credit card
• Gambling/Casino fee – applicable when you use your credit card to pay for gambling activities

When should you use a personal loan or a credit card?

As you can see, while there are stark differences in personal loans vs credit cards in the Philippines, both loans can be beneficial for you if used responsibly. Given their differences, they can be useful for specific scenarios and financial needs.

Here’s why you should get a credit card:

• You can use a credit card for small expenses, especially those that you can pay in full at the end of the billing cycle.
• You need funds or credit you can access anytime.
• You can get access to rewards and other promotions.
• You intend to pay the full balance every month to minimize interest.

Here’s when a personal loan may be better for you:

• You need funds for a one-time, large-ticket expense, such as a home renovation or a business.
• You want to consolidate multiple, high-interest debts.
• You have a good credit score and can qualify for lower interest rates.
• You can commit to fixed monthly payments.

Stay on top of your finances with a personal loan or credit card

Either credit cards or personal loans can be a good choice based on your financial situation and needs. It’s important to understand what each type of debt entails, how much you can loan, potential repayment terms, interest rates, and fees so you can decide which is the best for you.

Do you need larger funding than your credit card provides? You may apply for Metrobank’s Personal Loans in the Philippines.