Credit Card or Personal loan: How to Decide?

There are times when we are faced with certain obligations that need us to shell out more money than we can afford. At such times, we have a difficult choice of either using our Credit Cards or Applying for a Personal Loan.

Of course, both of these are fairly distinct financial instruments and come with their own share of pros and cons. What works in one situation, might not be the best choice for the other circumstance. For example: Despite owning an SBI Credit Card with a limit of 5 Lakh, it might be optimal to Apply for an SBI Personal Loan for home improvement rather than exhausting the card limit.

Let us examine both of these unsecured credit types to understand which works better and when.

Credit cards

Notoriously known as the most expensive financing tools, Credit Cards are possibly the best instrument when it comes to paying utility bills and charging daily expenses. Of course, you have to clear your dues on a monthly basis, lest you will need to pay a hefty interest on the balance, which is often in double digits and can be as high as 42% per annum, depending on the card you use, as well as your credit history.

That being said, a Credit Card can be easily viewed as an optional debt that you can take for a period of up to 45 days, without having to pay any interest. There may be times when you need the card to cover your expenses, and there may be those times when you can manage all your finances on a cash basis. Either way, it is a comfort to have a ready financial tool right in your wallet, which can act as quick as you want, for short term needs.

Personal Loans

Personal Loans largely differ from Credit Cards in the fact that you have to consciously make a choice to borrow a lump sum of money, which you must then repay along with the interest in the form of EMIs, over a period of 1 to 5 years.

Even Personal Loans do not offer much respite in terms of the rate of interest which can be anywhere between 11 and 22%, again depending on your credit history.

A large majority of banks offer Personal Loans for amounts varying from Rs. 50,000 to Rs. 15 Lakh, thus implying that this credit instrument is the best picked for big-ticket purchases or investments such as the expansion of business, home renovations, debt consolidation, and bearing the expenses of higher education amongst others.

Credit cards vs. Personal loans

Here are some aspects on the basis of which you can decide, whether to go for a Credit Card or stick to a Personal Loan.

1. Interest Rate

While a Credit Card offers an interest-free period of up to 45 days, a failure to repay the debt within this span might attract a substantial interest rate of 11 to 42% per annum. A Personal Loan, on the other hand, offers no interest-free period at all. The interest starts adding up to the principal amount as soon as the loan amount is disbursed to your account.

2. Timeline

Ideally, you must be able to pay off a Credit Card balance within a month’s time. If not, you may take some extra time, albeit you will need to pay the interest on the balance that you carry forward. With a Personal Loan, you can choose to repay your debt over a span of 12 to 60 months, as per your convenience.

3. Loan Amount

When using a Credit Card, the amount you can essentially use as debt largely depends on your credit limit. Besides, in an ideal situation, you must not charge your card beyond 30% of your credit limit. For instance, if your credit limit is Rs. 1 Lakh, you should use the card to make payments worth only Rs. 30,000 in any given month. Only if absolutely needed should you go ahead and use the remaining amount.

As far as Personal Loans are concerned, you can avail a loan of any amount up to Rs. 15 lakh, depending on your creditworthiness and the purpose for which you are seeking the loan.

If the debt is small, within your credit limit, and you are sure of being able to pay it off within a month’s time, your Credit Card should be your go-to option. If the amount is substantial, and you would need some time to repay the same, a Personal Loan might prove to be the ideal pick for you.

We hope that you can now take an informed decision regarding when and where to use Credit Cards to borrow money, and when to seek a Personal Loan to fulfil your financial obligations.

Also Read: When in Need Turn to – Personal Loan or Credit Card?

To apply online for Credit Cards, Secured Loans and Unsecured Loans, visit www.mymoneymantra.com, the leading online lending marketplace that offers financial products from 70+ Banks and NBFCs. We have served 2 million+ happy customers since 1989.