Instant Loans vs. Credit Cards: 5 Points to Know
Indian customers are now practically spoilt for choice when it comes to debt instruments. Gone are the days when we had to run around banks to bank, to get a secured loan like a Home Loan or Car Loan. Many Indians still remember the times when a person booked a car and took delivery years later because he was denied the loan and had to save the money actually to pay for the car!
Those days are gone for good now! Today, a number of middle-class people have such easy access to credit that they can practically swipe a card and buy a bike or scooter in one go. Most of the Indians now have access to Instant loans or Credit Cards. This creates a lot of confusion among people who are just becoming financially aware.
Instant Loan is an innovation primarily driven by the advent of digital technologies and all-pervasive spread of the internet. It allows you to create a profile in a mobile app, get your KYC done, provide income proofs, and get a loan in the bank account in a matter of minutes. Most of these have started in the last 5 years or so. These apps have truly democratised credit access in India. Products like EarlySalary Loan allow any person in a regular job to get credit in a matter of few taps on the phone. Similarly, Kreditbee Personal Loan is a great new way to shop online.
Credit Cards, on the other hand, are a very mature concept. The first Credit Card in India was introduced in 1981 and was processed by Visa. Right from the beginning, however, the access to Credit Card has been filtered. Banks have been highly risk-averse and calculative with their Credit Card business. At the same time, Credit Cards also score much better than Instant Loans on a significant number of aspects. Let us look at five aspects where getting a Credit Card will help you score better overall experience.
Interest-Free Period: The biggest advantage of Instant Loan is near-instant access to money. But the catch is that with the instant loan, you also get charged interest from day one. Even if you pay back all of your loans on the very second day, you still get forced to pay the processing fee and interest applicable.
Credit Card, on the other hand, provides you an interest-free period of 45- 50 days. You do not have to pay any interest or processing fee if you pay off your Credit Card due in full within the defined period. Assuming that your Credit Card cycle starts from day 1 of every month and your bill gets generated on the 30th day of the month, you will have till 20th day of the next month to pay off your statement. Use Credit Card on day 1 of the first month, and pay on the 20th of next month, 50 days of interest-free credit for you!
Revolving Credit: An Instant Loan is a one-time loan. You get the loan amount in your account in one go, which you can spend, and then pay back in Equated Monthly Installments. If you want more money, you have to get a new loan – meaning you have to go through the entire approval process right from the beginning again and again.
Credit Card, on the other hand, provides a revolving credit. Once your card is approved, you get a set credit limit. You can use the limit as per your requirements as and when you need it. At the end of the month, if you pay as per your statements, you will regain access to all of your credit limit. No need to run through a lot of processing steps again.
Credit Score Improvement: Instant Loans generally touch your Credit Score at two points once when you apply for a loan and second when you finish paying off your loan. Unless you miss a payment, they do not bother about your CIBIL score.
Credit Card, on the other hand, is an ongoing relationship. Banks with whom you have a Credit Card relation will report your credit performance regularly, generally twice every year. Regular reporting of positive repayment performance to CIBIL by Credit Card Company means that your CIBIL Score keeps on improving on an ongoing basis. In-fact most people who have Credit Scores in 850-900 range tell that a large factor behind their super-strong Credit Score has been their prompt and regular repayment of Credit Card dues.
Reward Points: Instant loan is a one-time thing. Take it, repay it, and you are done. No advantage of prompt repayment. No benefit on frequent usage.
While an instant loan is a transactional business, Credit Cards are a relationship business. Credit Card companies provide reward points for every time you use the card. There is an Indian Oil Citibank Card where you get reward points in the form of free fuel. American Express Credit Cards offer so many travel benefits that you can practically travel overseas just on the basis of your reward points. Airport lounge access, free golf programs, travel benefit, flight miles, free movie tickets, there is no way Instant Loans match Credit Card in how much extra do you get.
Buyer Protection: Instant Loans are a one-time deal. You apply for a loan, you get your money, you spend it as you please and you start paying back EMIs. The lender doesn’t protect you against online frauds.
On the other hand, Credit Card companies offer very strong buyer and fraud protection. If you buy something with your Credit Card but you do not actually receive your product, you can call your Credit Card Company to invoke buyer protection. Credit Cards provide excellent fraud protection against any false charges or lost cards.
All in all, Credit Cards are meant for people who want to build their credit score and want ongoing credit options. Instant loans are better for people who want to use credit on an exceptionally sporadic basis.
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