Despite the best of financial planning and regular investing, unforeseen exigencies can always land one in a financial crisis.
To deal with such situations, the first two options that usually come to mind are taking a personal loan or using a credit card. However, both of these options have their pros and cons and are not always optimum for all situations.
Here is a comparison of the features of personal loans and credit cards to help you choose the best option.
Loan amount
Banks and NBFCs (non-banking finance companies) usually offer personal loans anywhere from ₹50,000 to ₹25 lakh. However, the actual loan amount will depend on the credit score, monthly income, job profile, etc. Additionally, lenders also prefer total EMI (equated monthly instalment) commitments of borrowers, including that of the fresh personal loan, to be within 40% of their monthly income.
In the case of credit cards, the issuers set credit limits for each cardholder on the basis of her monthly income and past payment track record.
Cardholders can swipe or avail loan against credit card up to the set limit beyond which they incur an over-limit fee.
This limit gets reduced by the amount spent through the credit card or amount availed as loan against credit card and gets increased as the cardholder repays his credit card debts. Some lenders also offer a special form of loan against credit card, over and above the credit limit of the cardholder, thereby not affecting his credit limit.
The disbursal of conventional personal loans usually takes 2-7 days of making the loan application. However, some lenders offer instant personal loans, disbursing them within the same day of the application. Credit access through a credit card is usually instant. Loan against credit card and EMI conversion are processed within the same day as they do not involve any additional documentation.
Interest rate
Interest rates of personal loans range between 11–24% p.a., depending on the loan amount, monthly income, repayment tenure and employer.
While financing your spends through credit cards is free as long as the entire bill is repaid by the due date, carrying outstanding balance attracts hefty financial charges of up to 47% p.a.
Converting the entire dues or particular transactions into EMIs can cost anywhere from 12% to 25% p.a. While loans against credit card are also offered at similar interest rates, personal loans interest rates outscore them by 1-2.5% p.a. for people having similar credit profiles.
Availing a personal loan can cost processing charges of 0-2.5% of the loan amount. Although, swiping credit cards do not cost any processing charges, taking a loan against credit card or converting your outstanding to EMIs can involve processing charges of up to 3%.
Repayment tenure
While personal loans usually have tenure of 12–60 months, credit card outstanding does not have to be repaid within a pre-determined schedule. One can always opt for the costlier option of revolving credit. However, in the case of EMI conversion, the repayment period can range between three months and 60 months. Similarly, the tenure of loan against credit card usually ranges between 6 months and 5 years.
While some lenders do not penalise pre-payment of personal loans, most charge 2-5% of the outstanding balance as prepayment charges. Some lenders allow prepayment of personal loans only after the repayment of a certain number of EMIs.
Credit card issuers also penalise pre-payment of loan against credit card and EMI conversion by way of pre-payment penalty of up to 3% of the loan amount.
Making a choice
Use your credit card to meet your shortfalls if the amount is too small and too urgent to wait for a week. Opt for EMI conversion if the entire bill amount cannot be repaid by the next due date but can be repaid within 3-6 months. Go for a loan against credit card if it costs less than EMI option.
Personal loan should be preferred when the loan amount is sizeable and one can wait for the disbursal for at least up to a week. Personal loans also carry a lower interest rate than loans against credit cards for the same credit profile. This will also keep the credit limit free for financing daily spends and future exigencies.
(The author is head of unsecured loans , Paisabazaar.com )
