Personal loan Vs Credit card

In Singapore, both personal loans and credit cards are popular options for borrowing money. However, the purpose for each type varies considerably. Before taking a personal loan or an additional line of credit, you’ll have to analyse the situation at hand, evaluate your overall financial standing and credit situation.

Like all things, both personal loans and credit cards have pros and cons. Here are some of the things you should consider before applying for a personal loan or a card loan:

• Collateral: A personal loan, although mostly unsecured, may sometimes need a pledged asset or a guarantor depending on the exact nature of the loan. Most term loans in Singapore are unsecured. However, secured overdrafts need to be backed by collateral, which could either be a movable asset or an immovable asset held with the lender (e.g. fixed deposit, mutual funds, unit trusts, etc.) Credit cards are always unsecured. That is why lenders usually take your credit score and payment history into consideration while setting your credit limit or deciding which type of card to offer you. Although your debt-to-income ratio may not be factored in your credit score, banks usually check your debt burden ratio and debt-to-income ratio before giving you access to more credit. For secured personal loans, your income won’t be a factor. The credit limit is determined by the value of the asset. In Singapore, you can get an unsecured personal loan which is four times your monthly income or even higher, depending on the income bracket to which you belong. However, a higher credit limit on an unsecured loan may also increase your risk rating and make you less desirable for lenders, who see that you already have access to easy credit.
• Approval time: Approval time is much faster for a card. All you need to do is inform your bank that you want to take a loan on your credit card and the money will be added to the primary account within one to two days. The vetting and approval process for a loan is more elaborate and time consuming. The whole process may take up to a week.
• Fixed instalments vs revolving credit: Term loans have to be repaid in fixed monthly instalments. The EIR on a personal loan in Singapore is low compared to a credit card. It could be between 8-15% compared to 24-28% on cards. For lines of credit though, you can pay off the credit used as per your convenience and pay interest only for the amount used. If you pay the outstanding balance on your card in full within the interest-free period every month, you won’t have to pay any interest. However, if you’re not paying in full, interest will accrue on interest. If you don’t make the daily minimum payment, a late fee will also be introduced in the next billing cycle and it will also attract heavy interest.
• Benefits: Cards can be categorised in terms of rewards and primary purpose of use. A credit card will earn you lots of rewards, cashback, discounts, miles and more on each eligible transaction. If you use your card responsibly, you can not only save yourself from paying interests but actually get rewarded for your discretion. Benefits are a lot more restricted on personal loans. You may get a joining benefit like a cashback, a lower rate of interest, processing fee waiver, etc. but they are limited in comparison to cards. What makes a personal loan attractive is its low interest rate and predictability.
• Debt consolidation: Debt consolidation can be done with a personal debt consolidation plan or through balance transfer. Transfering all your debts on a low- or no-interest credit card is the best option if your credit utilisation ratio has gone through the roof. A debt consolidation loan is also a good option especially because it offers a flexible tenure. You may get a complimentary card and chequing facility, too. However, the EIR may be higher than on balance transfer.
• Impact on credit score: A personal loan impacts your credit score less than a credit card because the interest is lower and payments are fixed. Risks of default are lower. If you don’t use your card smartly – opening too many lines of credit at the same time, letting your credit utilisation ratio overrun the recommended 30% barrier repeatedly or if you’re not settling the dues in a timely fashion, you can end up lowering your score much faster.
• Pre-closure: Pre-closure may draw a penalty on a personal loan. Most lenders won’t encourage you to pay more than the fixed monthly instalment on your loan. You can however, continue to pay more than the minimum due on your card. If you want to close your account after one year or so, no pre-closure charge or processing fee may be applied although it may vary from lender to lender.

A card should ideally be used for short-term financing needs, especially purchases when you’re confident that you can pay off the amount on time. Personal loans are ideal for longer tenures. Moreover, the limits can vary drastically. If you’re planning to make a big-ticket investment, a personal loan is recommended rather than overdrawing credit on your card.