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Personal loans or credit cards: Which is better for short-term goals?

Selecting between the two options depends on the repayment ability of the individual, the existing burden of any EMIs and future expenses.

April 20, 2022 / 01:13 PM IST

With the ever-evolving credit market, the deepening penetration of financial services, the sharp surge in new-to-credit customers alongside ambitious objectives of millennials, and increased accessibility due to wider digital inclusion, individuals are readily applying for credit to fulfil various objectives.

There are numerous instances of the need for extra cash such as a foreign holiday, an extended domestic vacation, a wedding, purchase of a gadget, buying furniture, or house renovation.

Credit card vs personal loan

A credit card or a personal loan can effectively fill the money shortfall. However, the choice of credit depends entirely on the repayment capacity, the requirement of funds, and the purpose for which the extra cash is required.

Both credit cards and personal loans are unsecured credit facilities, though their structures are different. A credit card offers revolving credit that can be utilised over and over again, provided the bills are paid on or before the due date.


On the other hand, a personal loan facilitates the borrower with a lump sum that can be used at ease and can be repaid according to a schedule agreed between the borrower and lender before sanctioning the loan amount.

Calculative comparison

Consider an individual who needs Rs 5 lakh for a foreign vacation, buying a premium smartphone and minor fixes at home. The person’s monthly income is Rs 80,000. Let us understand the transactions with the usage of a credit card.

With a credit card, one can book the flight tickets and hotel reservations, buy the smartphone and pay for the material required for home improvement.

A credit card also allows transactions to be split into equated monthly instalments (EMIs) that will be billed with the periodic credit card cycles and can be subsequently paid with ease. Many banks allow large-ticket transactions to be split into smaller EMIs without levying a processing fee.

For example, the total amount of hotel reservations and flight ticket bookings for a 6-night and 7-day foreign trip came in at Rs 2.5 lakh. The amount can be converted into a 24-month EMI structure at the rate of 14 percent, following which the amount to be repaid is Rs 12,003 every month.

Secondly, the smartphone was bought for Rs 90,000 and the amount converted into 12 EMIs at the rate of 12 percent, which is a monthly payment of Rs 7,996.

Lastly, bathroom fittings and tiles were purchased for Rs 1.6 lakh, which was converted into 12 EMIs at the rate of 14 percent, and the monthly EMIs turned out to be Rs 14,366.

The total EMIs for a month add up to Rs 34,365 for the first year and Rs 12,003 for the second year. The total pay-out after two years would be Rs 5,56,416, of which the interest outgo is Rs 56,416.

Although personal loan interest rates vary from 10 percent to 20 percent, in a scenario where an individual takes a personal loan of Rs 5 lakh at the rate of 14 percent for two years, the EMIs came in at Rs 24,006. In this case, the total payout would be Rs 5,76,144 and the interest outgo is Rs 76,144.

The interest on the personal loan is higher than that on a credit card as the amount of Rs 5 lakh is repaid in 24 months, while the credit card allows the transaction of buying a smartphone to be sliced into 12 EMIs at a relatively lower rate.

Such arrangements are not possible with a personal loan, which can be for a year or two years or a mutually agreed tenure. But it can’t be 12 months for Rs 2 lakh and 24 months for Rs 3 lakh.

Which credit line to choose?

Selecting between the two options depends on the repayment ability of the individual, the existing burden of EMIs (if any), future expenses that are certain to happen and periodic monthly expenses.

Looking at the calculations, a credit card is suitable because the interest is almost 26 percent lower than that of a personal loan. Moreover, most lenders charge an upfront processing fee that ranges from 0.99 percent to 1.99 percent of the personal loan amount, which makes the credit card option even more beneficial and cost-effective.

However, a personal loan may be selected if one is unable to service EMIs of Rs 34,365 for the first year due to certain expenses and higher cost of living.

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Raj Khosla is MD,
first published: Apr 19, 2022 06:28 am
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