July 11th, 2019 | Updated on June 3rd, 2021
In case you have to consolidate debt at high-interest or finance a huge expense, your options will include two types of credit- credit card and personal loan in UAE.
The best option for you is generally based on the credit score, the amount of money you require, and the amount of time you require for the repayment of the debt.
Let’s take a look at credit cards v/s personal loans and determining the best available option.
Personal Loan
Personal loan in Dubai is generally an unsecured loan which is taken for a lot of purposes that range from medical reasons to vacation to an expensive purchase, and even consolidation of debt. The personal loan interest rate is usually higher as it is an unsecured loan.
Credit Card
A credit card loan in UAE is a pre-approved loan, which does not need much documentation. It is the quickest source of attaining an unsecured credit. In such loans, a certain part of the credit card limit, which is usually unutilized is provided as a loan. Credit card loan is different from cash withdrawal.
1. When Are Personal Loans A Good Option?
Here are the situations where a personal loan can prove to be a good option.
- You wish to consolidate debts having high rates of interest.
- You need to finance a huge expense.
- You wish to have a credit that ranges from good to excellent.
- You are capable of making monthly payments throughout the loan tenure.
Personal loan interest rate in UAE usually ranges from 5 percent to 36 percent (approximately and not necessarily), depending upon the discretion of the bank. The borrowers having good credit can qualify for an interest rate at the lower end of the range. You may also get high borrowing limits.
Personal loan in UAE is an installment loan. This means that you get lump sum money and make fixed payments every month during the loan tenure. Many lenders online allow you to pre-qualify for a personal loan to check the estimated rates, without any impact on your credit score.
High borrowing amount, low-interest rates, and fixed terms of repayment make these personal loans a way to consolidate debt or finance huge expenses like home renovation.
The rate that you end up receiving on a personal loan is dependent majorly upon your credit score. The lenders may also check your income, credit history, and debt-to-income (DTI) ratio. You can use the personal loan eligibility calculator to check if you can apply for the loan or not.
2. When Are Credit Cards A Good Option?
Here are the situations where a credit card can prove to be a good option.
- When you need financing for smaller expenses.
- You are capable enough to pay your balance in full every month.
- When you qualify for a zero percent promotional offer.
Credit cards can prove to be an expensive financing solution if you do not pay back the balance every month or qualify for a credit card that has a promotional offer of 0% interest rate.
Usually, credit cards have two-digit interest rates, and carrying a huge balance may negatively affect your credit score.
Credit cards are a revolving kind of credit, which lets you access funds repeatedly. Instead of getting lump sum funds, your credit card comes with a credit limit up to which you can charge it. Minimum repayment amount every month is generally a low portion of your balance.
However: You can avoid paying interest rates by making payment of full balance on or before the due date of payment.
With higher interest rates and more risk of carrying a high balance, credit cards are considered best for short-term finances. It is suitable for the purchases you can pay for in full such as monthly bills and daily expenses.
3. Personal Loan V/s Credit Card
Although they seem to be similar, personal loan and credit card loan are not exactly the same.
1. Documentation
A personal loan needs a number of documents for its approval and may take a few days for coming through.
However: A credit card loan doesn’t really need any such documentation and is usually quicker to attain.
2. Interest
Interest is amongst the most important factors which are considered while opting for a loan. Generally, personal loans are offered at rates of interest higher than that on credit card loans. But, another important factor is that you can avail loans on credit card at flat rates of interest, while you can avail a personal loan in UAE at reducing balance interest rates.
In case of flat interest rate loans, the interest charged monthly is applicable on the initial amount of the loan and stays the same during the entire duration of the loan. It is not even affected by the decrease in the principal amount. While as far as reducing balance rate loan is concerned, the outflow of interest decreases with the decrease in the principal amount.
3. Unsecured Loan
Both of these loans are unsecured as there is no involvement of any collateral.
4. Tenure of the Loan
The loans on credit cards can be opted for lower tenure, while the personal loans can opt for longer durations.
5. Amount of Loan
A loan on credit card is a suitable option in terms of a low amount of loan, while in the case of personal loan in Dubai; you will be able to avail a huge amount of loan.
6. Consolidation of Debt
Both personal loans and credit cards can be used for consolidating multiple debts. This helps in saving on interest and getting out of the debt quickly.
A personal loan can be a better option for consolidating debts when the debt amount is huge and you need more time for paying it off.
While: Credit card is a better option for consolidation of debt when the debt amount is smaller and you have good credit. A Debt Consolidation Firm Is All You Need To Pay Off Student Loans?
To Sum Up!
What is your general plan of action whenever you land up in need of credit or cash or you lack adequate funds? You might either choose to swipe that credit card or check your personal loan eligibility so as to apply for the same. Both credit cards and the personal loan will help to overcome your financial burdens. In order to decide which one to go for, a credit card or a personal loan, read the above-mentioned comparison.
