When you need money quickly for things like medical treatment, home repairs, or travel, most people use a credit card or a personal loan. Both give fast financial help, but their benefits, interest rates, and risks are different. By choosing carefully, you can save money and avoid heavy debt.
Defining Personal Loan
A personal loan is classified as an unsecured loan, meaning no collateral is required. Based upon your income level and credit rating, a personal loan is sourced from either a bank or NBFC (Non-Banking Financial Companies). As a fixed amount of funds, the term of repayment will be established as equal monthly installations over the term of the loan, typically one to five years. Interest rates vary from approximately 10% to 24% over the course of the loan. It is best to use a personal loan for larger expenses, such as weddings, college tuition, or medical emergencies. The primary advantage with a personal loan is that the interest rate associated with the personal loan will be lower than if you used a credit card for the same purpose, but it may take several days to process and obtain a personal loan.
Understanding How Credit Cards Work
Credit cards will give you access to spend money until you reach the credit limit. If you pay back the full amount within 20 to 50 days, the money is interest free. If you fail to pay the full balance, the yearly interest rate could range from 30% to 42%, which is significantly higher. Credit cards are most effective for daily purchases, smaller purchases, or short-term emergency needs. Credit cards also provide benefits such as cashback, reward points, and insurance on your purchases and travel.
When to Choose Which Option
- Cost: If the expense is more than Rs 50,000, take a personal loan. For smaller costs, a credit card is enough.
- Repayment Period: Personal loans are good for long-term repayment with EMIs. Credit cards are better for short-term repayment.
- Urgency: Credit cards give money instantly. Personal loans take a few days.
- Repayment Capacity: Late payments increase interest and can harm your credit score.
- Cost Comparison: Check interest rates, processing fees, and other charges before choosing.
- Impact on Credit Score: Using both properly can improve your credit score, but defaults can hurt it.