Are Unsecured Loans Better Than Credit Cards?
Unsecured loans and credit cards are both aimed at helping people to meet small emergencies. However, the latter is a revolving credit, and the former is a closed-end loan.
What is the difference between an unsecured loan and a credit card?
Both types of credit allow you to borrow money without putting up collateral. There is no risk of losing your house or car in case of default. The main difference between an unsecured loan and a credit card is how you receive and repay the borrowed amount.
Unsecured loans are a closed-end loan, meaning you borrow a lump sum of money that you repay in fixed instalments over a set period of time. Once the loan is settled, the loan account will be closed. If you feel the need for borrowing money down the line, you will have to apply for a new unsecured loan.
Credit cards, contrary to personal loans, are a type of revolving credit. They come with a limit up to which you can withdraw funds at a time. You repay the balance when the credit card bill is generated. After repaying the balance, you can withdraw funds again as and when you need.
| Features | Unsecured loans | Credit cards |
| Type of credit | Fixed-term loans | Revolving credit |
| Repayments | Fixed monthly instalments are made | Full balance is required to be paid off once and for all |
| Interest rates | Vary between 9% and 24.9% | Vary between 24% and 36% |
| Turnaround time | Within a couple of days | Within a day or two |
| Flexibility | Structured repayments, so they are less flexible | Highly flexible, you can reuse the amount anytime |
| Best uses | Ideal for large expenses such as home renovation | Ideal for short-term emergencies and expenses |
Credit cards do not charge interest rates if you pay off the whole balance within the grace period. If you make minimum payments, interest will accrue on the outstanding balance.
Unsecured loans for bad credit people are available from various lenders. Although high interest rates are charged, credit cards are issued only when your credit score is up to scratch.
When is an unsecured loan better than a credit card?
When you need money to meet small emergencies, you can use either unsecured loans or credit cards. As long as the loan amount is up to £1,000, unsecured loans are also discharged in one fell swoop. The repayment length will be between 14 days and a month, depending on the loan amount.
But there are certain expenses when you will find only unsecured loans fruitful.
- Debt consolidation
If you are struggling to keep up with different payment dates of payments, you can consolidate all of them into one large loan. This will enable you to qualify for lower interest rates than the existing interest you have been paying on your current debts. However, you must have a good credit score. By consolidating debts into one large personal loan, you will pay down the debt in fixed monthly instalments, which makes payments more manageable.
If you have outstanding balances on multiple credit cards, you can use unsecured loans to consolidate them. You will need a balance transfer card. This will enable you to clear credit card debt without any interest, provided you manage to do it within the interest-free period. Otherwise, you will end up paying a lot more in interest.
- A large purchase
If you want to buy an appliance or you need money to renovate your house, unsecured loans will come in handy. You can easily borrow a large sum of money even if your credit score is not impressive. Since you will be paying it back in fixed instalments, personal loans do not strain your budget.
Credit cards are meant for funding short-term expenses only. If your card offers a large limit, you are still recommended not to consume more than 30% of the limit.
When is a credit card a better choice than an unsecured loan?
Credit cards could be a better choice than personal loans when you need money to fund the gap in savings. For instance, if you come across some medical emergencies and your savings are short on cash. Credit cards can bridge the gap. A small amount of money is easy to repay in full.
Credit cards are also helpful for making smaller purchases as they let you earn rewards and provide complimentary benefits such as extended warranties and purchase protection.
Which is easier to get approved?
Credit cards are generally easier to get approved, provided your credit score is stellar. If you have a good relationship with your bank and your financial condition is sound, you can easily get approval. Approval is instant. The credit card limit is decided based on your income.
However, in order to get approval for a personal loan, you will have to provide additional documents such as pay slips and bank statements. Apart from that, lenders will also take into account employment stability. Unsecured loans take a few days to sign off on your application. The good thing is that they can be approved despite a compromised credit history. Direct lenders are more flexible than banks when it comes to a loan amount.
Which is better for different financial goals?
Unsecured loans are ideal for the following expenses:
- Wedding
- Home renovation
- Appliances and gadgets
- Consolidation
Credit cards are ideal for the following expenses:
- Shopping
- Subscriptions
- Car repair
- Medical bills
- Vert bills
- Utility bills
What are the main pros and cons of each of them?
| Unsecured loans | Credit cards | ||
| Pros | Cons | Pros | Cons |
| Fixed repayments | Strict eligibility | Instant access | Higher interest rates |
| Lower interest rates | Less flexibility | Rewards and perks | A high debt risk |
| Higher loan limit | Longer processing | Good for emergency | A lower limit |
The bottom line
Unsecured loans are better when you need money for larger expenses. However, credit cards are a better choice when you need money to make smaller expenses, especially unexpected ones.
FAQs
Is it cheaper to get an unsecured loan than a credit card?
Yes, unsecured loans are cheaper than credit cards as they charge lower interest rates. Further, they also accept applications from borrowers with subpar credit ratings while credit cards strictly adhere to traditional lending practices.
Should I use a loan or a credit card for a large purchase?
Credit cards are not meant for making large purchases. Even if your credit card offers a large limit, you should avoid using it for large expenses. This is because they do not spread the cost across months, unlike unsecured loans. For large purchases, you should consider unsecured loans.
Can I pay off my credit card debt using an unsecured loan?
It is not recommended to use an unsecured loan to pay off credit card debt. You should instead apply for a 0% balance transfer card to eliminate credit card debt.
Is a personal loan safer than a credit card?
Neither option is inherently safer than the other. It depends on how you use credit. If you borrow more than you can afford, or if you rely excessively on credit cards, you risk racking up debt.
Can I have both an unsecured loan and a credit card?
Yes, you can use both an unsecured loan and a credit card. They both must be used for different needs. Unsecured loans should be used for large expenses, and credit cards should be used for small expenses.