Personal Loans vs Credit Cards in Kenya: Which Should You Use?

To secure one's financial future, savings can make all the difference. But it is not always possible to save and sometimes one needs a line of credit to make certain purchases, invest in a new or existing business or even to secure savings.

During such times one needs to be informed about what line of financing is best. Among the various options available are personal loans and credit cards, with personal loans being the most common.

Both options can provide the money needed, but they each have different terms. Depending on where one stands financially and the goal they seek to accomplish, one might be better than the other.

Deciding between applying for a credit card and taking up a personal loan depends on many factors, key among them being how much money one needs and how fast a repayment can be made.

When to Use a Credit Card

When one applies for a credit card, they get access to a revolving form of financing meaning they can access the funds repeatedly. Unlike other forms of credit where you get a lump sum of cash, you have an amount of money (this depends on the limit you qualify for) that is available to you when you need to use it every month.

Credit cards issuers also allow their customers to make a minimum monthly payment usually between two and three per cent of the balance. 

This is compared to predetermined monthly installments that spread out the owed amount over a fixed period of time for other credit types such as personal loans. Which means that in a month that you do not have much to repay, you can just pay back the minimum amount. 

NOTE that it is not advisable to keep repaying only the minimum amount since it keeps you in debt for a longer period of time, making your credit more expensive in the long run.  

Credit cards are best for short-term financing and purchases that one can pay back in full such as monthly bills and daily expenses. This is even more beneficial for cards that come with rewards such as cashbacks and discounts for everyday purchases such as groceries. 

Credit cards can be an ideal form of credit for you if you are capable of paying the balance in full every month. If you can, it is recommended that you keep paying in full because it means you will never have to pay interest on the amounts used while you keep enjoying all the benefits that come with your card. 

If one pays the bill in full before the interest-free period lapses, usually 30 to 55 days in Kenya depending on the issuer, the user does not pay any interest.

If you own a business, a credit card can come in handy in helping you smoothen cashflow for your business especially if you deal with debtors who pay you periodically. If, for example, you want to restock your store but don’t have cash at hand because your debtors are yet to pay, you can use your credit card to purchase the needed stock and pay it back when your debtors pay you at the end of the month. 

Advantages of Using a Credit Card

• The holder can use it whenever they need to.
• Interest-free payments if the holder pays in full before the repayment period lapses.
• Access to a wide range of rewards; cashbacks, discounts and travel perks.
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• For those with poor credit history, credit cards can be useful in building up better financing terms over time.
• A good repayment history qualifies the user for higher limits.
• Credit cards can spread the payments of large purchases especially if you get a 0% purchase credit card.
• Credit cards can be relatively easier to qualify for
• Some credit cards offer 0% APR promotional periods (as long as 18 months) - but this is usually rare.

Disadvantages of credit cards

• Have higher interest, which is computed monthly, as compared to personal loans.
• Some cards come with annual fees.
• Interest and fees can add up if the holder fails to make full payments or only pays the minimum amount every cycle.

When to Choose Personal Loans

A personal loan allows an individual to borrow a lump sum for a personal need such as making an investment in a company, paying school fees, furnishing the house or buying a car, etc. One pays the principal, which is the amount borrowed plus interest and other fees depending on the lender, which together make the cost of borrowing the loan. 

Personal loans are a good option when consolidating high-interest debt. Debt consolidation is the process of taking out a new loan to pay off other forms of debt. Multiple debts are combined into a larger single loan usually with lower interest or longer repayments period or both. Debt consolidation can be used to deal with student loans for instance.

If you can qualify for a low interest rate - when you have a good credit history and the bank determines you are a low-risk borrower you can qualify for low interest credit - then, a personal loan, when considered on its own, is a good option. 

Additionally, if you are looking to finance a large-one time project such as a home-improvement project etc., a personal loan can be a good project. It is important to note that personal loans are not exactly designed to be taken frequently. 

You want to take a personal loan when the use you are going to put that money to is ideally going to improve your finances in the long run - that is how you can justify the cost that comes with getting the loan. 

Advantages of Personal Loans

• Have generally lower interest rates as compared to credit cards. [NOTE That if you are considered a risky borrower due to poor credit history, the interest rate may be higher]
• Fixed monthly payments can help in budgeting
• You can access the funds in as little as 24 hours with certain Kenyan banks.
• A personal loan, like any other form of credit, can be a good avenue to build creditworthiness for future financing.
• Personal loans spread the cost of a huge purchase into manageable payments.
• An unsecured loan is not attached to the borrower’s assets. 

Disadvantages of Personal Loans

• Come with high interest rates for borrowers considered as high risk.
• Payments terms may be hard to adjust especially after unforeseeable hiccups
• One gets a fixed amount of money not a revolving fund where one can draw from constantly.
• If one takes a secured loan, then property attached may be possessed by the lender if the borrower fails to pay up the loan.
• Personal loans come with fees [See full list here] such as processing and disbursement fees. The lender will either deduct this fee upfront or make it part of loan repayments. Most lenders in Kenya deduct the fees upfront, meaning you may get less than the actual amount you needed if you had not factored these fees during your application. 
• Personal loans are long-term financial commitments. While this is fine with people who will have a stable income in the foreseeable future, it could be detrimental if one has fluctuating earnings.
  

How Do Credit Cards and Personal Loans Compare? 

Personal Loans and Credit Cards Similarities

• To access either, one must be creditworthy. Lenders must be sure that you are capable of paying back loaned funds before you qualify for either.
• Both types of financing can be unsecured, that is, they are not attached to the borrower’s property. Note, however, that personal loans can either be secured or unsecured.
  To get a secured loan, one must have collateral, for example, a house, land or a car that the loan issuer can use to recover back their money if the borrower defaults on payments.

• Failure to pay also dents the borrower's creditworthiness in both classes of funding.
• Both classes of financing are provided by banks in Kenya. However, one can get a personal loan from microfinance banks, microfinance institutions, savings and credit co-operative societies (Saccos) and digital lenders.

Differences Between Personal Loans and Credit Cards

• Credit cards often have higher interest rates compared to personal loans
• Credit cards are best for short-term purchases such as bills, restocking your business and shopping while personal loans can be beneficial for big purchases such as a car or to make an investment. Note that, you can also use credit cards to spread the payment of large purchases. 
• Personal loans do not have the rewards attached to credit cards. If you take a personal loan, you will always have to pay back with interest. 
• While personal loan repayments schedules are generally pre-determined, credit card repayments depend on the user’s spending.
• Personal loans are a one-off lump sum sent to the borrower's account while credit cards are a revolving line of financing that one can access at any time as long as the limit is not exceeded.
• While personal loans are repaid using a bank schedule, credit cards allow for users to pay minimum amounts or make full payments.