When one needs money urgently for unexpected reasons, such as medical bills, home maintenance, or a for travel, most people turn to their credit card or a personal loan. Both can get you the cash in a pinch, but they also have different costs, benefits, and drawbacks. Learning which one suits your financial needs best can save you money and spare you future stress.
Understanding personal loans
A personal loan can be given by a bank and non-banking financial company (NBFC). You borrow a sum of money and repay it in the form of monthly instalments (EMIs) over a fixed period, say one to five years. Interest rates range from 10% to 24% per annum, depending on your repayment track record.
Personal loans work best in case of larger needs—like a wedding, college, or emergency medical expenses—because they allow for a disciplined repayment plan and come interest rates that are typically lower than credit card bills. But the application process, although faster than for most other loans, takes several days to be approved and disbursed.
Understanding credit cards
A credit card, meanwhile, lets you borrow an approved sum. If you settle the current bill within the interest-free time (usually 20-50 days), you owe no interest. Otherwise, interest will be charged—usually between 30% to 42% annually, making it one of the most expensive borrowing instruments.
Credit cards should be left for small, short-term buys or emergencies where you're able to pay it off immediately. They're convenient and quick, but the high interest fees can make a small purchase become a staggering debt if you don't pay it back on time.
When a personal loan is appropriate
Opt for a personal loan if you need more than ₹50,000 and you need more time to pay. The EMIs are fixed monthly, so they are easy to budget for, and the interest rate is lower, so your overall expense is lesser. It is also beneficial to consolidate debts—gathering various high-interest payments into one easy loan.
When credit card is the better option
Go for a credit card if the expense is low and you are certain of repaying the entire amount before the payment due date. The interest-free time frame makes it a cheap mechanism for borrowing in the short term. Credit cards are also convenient if you want other incentives such as cashback, reward points, or free insurance cover.
Things to consider before making a decision
1. Urgency of funds: Credit cards offer immediate access, but personal loans can take a few days.
2. Repayment ability: Use a credit card only if you know you will be able to make the full bill payment on time, otherwise, a personal loan is safer.
3. Cost of borrowing: Compare interest rate, processing fee, and other fees before deciding.
4. Credit score impact: Paying your debts on time with either option improves your credit history, but non-payment damages your score.
Both personal loans and credit cards are excellent financial tools if used correctly. For small, short-term requirements, a credit card that is settled prior to the payment date is the cheapest choice. For larger or more extended requirements, a personal loan is usually better and cheaper. The trick is to match the borrowing tool with your repayment willpower and the size of your need.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
