We are all aware of both credit cards as well as a personal loan. Credit cards are considered as the easiest way to buy something or to incur small expenses, and then pay later. Credit cards are thus issued by the bankers and then carries a limited amount of credit that the card holder can avail. Credit cards’ billing is done as per the billing cycle of the bank. Customers can also make payments as per the cash which is available to them. If they miss their due payments by a certain due date then they are charged penal interest and fees. So, in other words, credit cards help the borrowers to use the money for an unlimited period of time with the costs that are attached.
A personal loan is called as unsecured loans which are offered by the bankers to fund larger expenses like say holidays, hospitalization, home improvement, etc.
Unsecured loans are also those for which the borrower doesn’t have to mortgage any assets or to offer any security. A personal loan is also ideally bigger amounts. Personal loans thus carry a limited tenure with fixed repayment schedule of equated monthly installments (EMIs).
The question which is faced by the common man is as for how to choose between these two options. Borrowers however normally make a mistake in choosing a right option.
This article gives us a guide as to what should the potential borrowers choose – credit cards or personal loan so that they make a correct considered decision.
Level of expenditure
Credit cards are considered as the best for making smaller expenses like daily purchases, shopping, and dining etc. against which the customers can also earn reward points, and the said outstanding can be paid off on or either before the due date or within a few months thereon.
A personal loan is thus best for larger expenditures, like say, of Rs.1 lakh or more, or for the purpose of consolidating all the smaller credit card debts. Personal loans are also suitable for a longer tenure of more than a year and they can extend up to two to three years.
As credit cards come without any end date and also against any predetermined repayment schedule, the interest rate which is charged on the credit card outstanding is higher than the personal loan. However, while personal loans have an inflexible minimum payment schedule, credit cards thus prescribe the payment of a minimum amount and also the balance amount can be carried forward at a cost.
So despite outstanding that the credit card carries higher rate interest, if a borrower is not sure of her/his ability to repay the amount within a prescribed period of time in the predetermined amounts, then the borrower can thus choose a credit card over a personal loan.
Simplicity of process
Balance tilts in the favour of credit cards due to ease of availing credit as it is compared to personal loans. Borrowing through the credit card is also simple.
Borrower however just needs to swipe the card at the outlet where s/he wants to spend. Against that the personal loans are sanctioned after a formal loan application is made in the prescribed form and it is submitted to the bank with all supporting the documents.
Banks would then take time in order to evaluate the credit worthiness of the applicant and her/his repayment capacity and then sanction the loan. So, credit cards are considered as best for immediate spending whereas personal loans are the best in case large ticket expenses are planned.
One exception to this rule is that sudden hospitalization expenses that can be-be initially incurred by swiping one or more credit cards and then the borrowers can apply for a personal loan and also work out a balance transfer or the consolidation of various credit card debts.
The biggest danger with the credit cards is that they encourage impulse spending and also allows unlimited tenure for repayment. The borrower can also keep spending more and more and it would get stuck in a debt trap.
Against that, a personal loan is thus more disciplined borrowing where a borrower cannot borrow a new loan without repaying the old loan or either having creditworthiness of making timely repayments on the outstanding amounts.
Also, the banks evaluate the quantum of the existing outstanding personal loans in order to decide whether a new loan can be disbursed to the borrower and whether s/he can repay it or not. So the person never gets into a debt trap in cases/he opts for a personal loan.
Credit cards can thus be used even when a borrower doesn’t have steady cash flows in order to repay the amount quickly or over a predetermined period of time. Hence the credit cards are preferable in small ticket transactions only. A personal loan is also far more suitable for the large ticket transactions.
So the next time you have to spend you should choose correctly between swiping and applying.