When you face an immediate expense but do not have cash in hand, then what is the best route to borrowing funds? You can either choose a personal loan or a credit card loan. Both have their pros and cons. However, low interest personal loans are much better than credit card loans, simple reason being that the former carries interest rate beginning from 11%, while the latter incurs a very high rate of interest up to 36%. Saving on the interest payout will help you manage your finances wisely.
How Does Rate of Interest Make a Difference to the Loan Cost?
If you are looking for a long-term borrowing, then availing a personal loan on lower interest rate than a high rate costing credit card loan, is much wiser. Why? Because a long-tenure will require you to pay more EMIs, thus extending loan cost, and a heavy interest will make you shell out more money than a short-tenure loan.
Let us first understand how a personal loan and a credit card works?
Both the above-mentioned form of credit requires you to repay with interest.
- Personal Loan: Here, you can borrow a lump sum amount of up to Rs. 20 lakhs. The amount is predetermined based on your salary, credit score, employment, documents etc. The loan carries a processing fee.
- Credit Card Loan: Here, there is revolving form of borrowing involved. There is a cap on how much amount you can borrow every month, depending on the monthly payment you make and credit limit allowed. There will be an annual fee to pay for credit card usage, irrespective of you using the card or not.
In both the borrowing-types, you will have to submit necessary documents and follow the loan guidelines, terms, and conditions. Choosing any of these is purely subjective and need-based. Yet, we will like to inform you about the personal loan benefits.
Benefits of Taking a Personal Loan over a Credit Card Loan
Below given are advantages of personal loans over credit card loans:
- A repayment schedule means the loan comes with an end date. Repaying the loan in timely manner and ending it sooner, will help you get over the debt sooner as well. Credit card loans may want you to lengthen the debt cycle, and spend more during repayment.
- A personal loan does not tempt you to overspend. It keeps in check how much amount you use, as the disbursal is lump sum. In credit card loans, you can keep borrowing, thus, it can tempt you to spend more than what you require.
- Personal loans also help in debt consolidation such as bills rising from credit cards, other unpaid loans, etc, in an instant. A debt consolidation via credit card will cost a lot and jeopardize finances.
- You can usually borrow more under a personal loan than a credit card loan. The latter comes with a credit limit that can change every now and then. But once disbursal of a personal loan is done, you can utilize the complete amount as required.
- When taking a personal loan from a financial institution and repaying the loan on time, you also improve your relationship with the financial institution and can take benefit of this to avail future credit and other forms of loans from the same bank/NBFC at a lower interest rate and better terms and conditions. A credit card loan may not give you that leverage.
It is evident that funds from either personal loans or credit cards are taken when you cannot pay for the expenses at hand. In such situations, your objective must be to also reduce the cost of borrowing, for which a low interest rate personal loan is a perfect solution.
