Personal loans and credit cards, both are instruments of credit with their different ways of functioning. Many a time you might have wanted to shop but confused about which option should you pay it with – avail a personal loan or just use your credit card.
How do you decide that? This article aims to make the decision making easier for you.
Before jumping into the advantages and the disadvantages of personal loans or a card, it is important to understand how these products function.
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How Does a Credit Card different from a Personal Loan?
Credit Card
A credit card is an instrument for payment issued to those considered creditworthy by the card issuer. Each card comes with a set limit, which is decided based on many factors like the credit score, income, and other loans held by the applicant.
An individual is free to spend the amount within the credit limit during a billing cycle. At the end of the cycle, an outstanding bill is generated which must be paid before the due date. If the amount remains unpaid, that amount and any further purchase are charged an interest rate of anywhere between 36-48% per annum.
Personal Loan
A personal loan is an amount borrowed from a lender on interest. In case of a personal loan, the entire sum of the amount is disbursed at once. This amount is repayable over a longer-term which is also called the tenure of the loan. This could be anywhere between 6 to 60 months. The interest and the principal are repaid in equal amounts over the tenure of the loan also known as the EMI.
As you can see, both the products are different in the way they function.
When you go shopping, you could be buying groceries, clothes, home appliances, or even electronic gadgets like mobiles or TVs. All these commodities come in various price ranges which may require different payment strategies.
Now let us explore various shopping scenarios in which you consider using either a credit card or a personal loan.
Day to Day Shopping
This could be the normal day-to-day shopping that you do for groceries, fruits, and vegetables. You could also include your expenses for eating out or home delivery of food/drinks. Here, the credit card comes across as a convenient mode of making these payments. It is better than having to carry around cash for all these requirements.
A credit card could also be used for making payments on not-so big-ticket expenses.
All expenses that you make on these transactions can be paid off when you get your credit card outstanding statement at the end of your billing cycle.
The problem with this method of paying for your expenses arises when you are not able to repay your credit card outstanding statement in full at the end of the period allowed. Interest rates on credit card outstanding are the highest for any credit product in the market. Moreover, any further purchases you make are also charged interest which means the usage of your card gets restricted.
When you are not able to make prompt payment on your credit card, your credit score can also get affected.
For this kind of day-to-day expenses, a credit card can be a great way of payment if you can make full repayment at the end of the credit period on your card. Also, avoid withdrawing cash from your credit card to pay for any of your expenses. Cash withdrawal on credit cards is charged interest right from the day of withdrawal. Also, it carries extra charges.
Shopping for Big-Ticket Purchases
You could need big-ticket purchases like a laptop, a TV, home appliances like washing machines, etc. The price range for these kinds of purchases is higher. Or it could be shopping for festivals like Christmas, Diwali or Dussehra, where the expenditure is on the higher end.
A credit card can be used to pay for these expenses, but, remember, the entire amount of the purchase will have to be paid off at the end of your billing cycle which may be a burden on your finances. Depending upon when you make these purchases on your credit card, the payment may need to be made as early as within 15 days of your purchase.
Making big-ticket purchases on your credit card can also result in a higher credit utilization ratio on your credit card, which may pull your credit score down.
In these kinds of situations, a personal loan may prove to be a better option as you have a fixed term of payment. Moreover, the interest charged on a personal loan is much lesser than a credit card. A personal loan makes it easier as there is no fixed end-use purpose and a loan could be used to anything from repaying a credit card debt to meeting your financial needs like payment of school or college fee, meeting emergency medical expenses, etc.
For Example:
A personal loan from Money View which is one of the leading online personal loan lenders in India allows you loans where you can choose the tenure for your loan which can go up to 60 months. The rate of interest charged on this loan also depends on your credit profile and starts from 1.33% p.m which works out quite cheaper than the interest on a credit card.
Time Taken for Personal Loan Approval
However, you may say that it takes time to get a loan processed and disbursed whereas, a credit card can be used instantly. It is true, but only to some extent.
Nowadays there are a lot of online lenders who ensure loans can be applied without any hassles. These loans are approved and even disbursed on the same day for many customers. When instant loans like these readily available, it makes no sense in incurring exorbitant interest charges on credit cards.
As an end note, purchase on credit cards can work towards your favor only when you can make full payment at the end of your billing cycle. If you are unsure, a personal loan works better in helping you manage your finances in a better fashion.
Author Bio: Surya Patra is a qualified webmaster by profession and Marathon Runner/Cyclist by passion with more than 6+ years of expertise in the financial domain. Surya is also an entrepreneur, enthusiastic in storytelling, content writing, and digital marketing professional.
