People have various credit options in the current financial world to manage expenses and achieve financial goals. Two of the most common forms of credit are personal loans and credit cards. This article discusses the suitable occasions for the use of credit cards and personal loans while providing information to empower you to make informed decisions.
Case study: Purchasing a high value item
For instance, if you wish to purchase a ₹1,00,000 iphone. You can either avail a personal loan of one lakh or make use of a credit card with a limit of one lakh. This is how you should decide:
Using a credit card:
- Interest-free period: Having a credit card is useful if it offers an interest-free period and you can repay the entire ₹1,00,000 within it.
- Consideration: To avoid paying high-interest charges, ensure that you have a clear plan to repay the amount in the interest-free period.
Using a personal loan:
- Fixed interest rate: Personal loan can prove to be cheaper if you may take longer to repay the ₹1,00,000.
- Consideration: Remember that any charges or fees associated with the loan could add to the overall cost.
Considerations before opting for personal loan or credit card
- Fees & charges: There can be annual fees, processing fees, or prepayment penalties associated with both credit cards and personal loans.
- Impact on credit score: Having high outstanding amounts on a credit card, and missing EMI payments on personal loans relative to its credit limit, can have a detrimental effect on your credit score.
What does an expert say?
“Credit cards are ideal for small or recurring purchases like groceries, fuel, or online shopping especially when you can repay the amount within allowed days to avoid interest charges. On the other hand, personal loans are better suited for large, one time expenses such as home, weddings, education, or consolidating existing debts. They typically offer lower interest rates compared to credit cards and come with fixed monthly repayments over a set tenure, which makes budgeting easier. In general, use a credit card for short-term, easily repayable expenses, and opt for a personal loan for long-term, higher-cost financial needs,” says Jai Kumar Co-Founder of TechFini.
In conclusion, whether to use a credit card or a personal loan relies on the type of expense, your ability to repay, and your financial intention. Making an informed decision means looking at your financial condition, knowing the terms, and comparing those terms to what you can repay.
Disclaimer: Mint has a tie-up with fin-techs for providing credit, you will need to share your information if you apply. These tie-ups do not influence our editorial content. This article only intends to educate and spread awareness about credit needs like loans, credit cards and credit score. Mint does not promote or encourage taking credit as it comes with a set of risks such as high interest rates, hidden charges, etc. We advise investors to discuss with certified experts before taking any credit.
