Before deciding on a credit card or a personal loan, it's important to understand the difference between the two. A credit card is a revolving debt wherein you can repay as much as you prefer with interest while a personal loan is an installment debt wherein you have to make regular fixed repayments in the form of EMIs.
Here is why a personal loan is a better bet than a credit card to meet financial contingencies:● In the case of a personal loan, you can create a budget depending on the Equated Monthly Installments (EMIs) and the overall interest payments that you have to make over the course of the loan tenure. The same can’t be said about credit card debt.
● Credit cards have a higher interest rate than personal loans. Don’t fall for credit card promotional offers. Although introductory offers on credit cards are attractive, the introductory benefit lasts only for the first 1 year or so. After you have completed the introductory period, the interest rate of your credit card is bound to increase drastically. Instead, opt for a low-interest rate personal loan with a suitable loan tenure.
● Personal loans are best suited for larger financial expenses like home renovation, wedding, vacation, debt consolidation (consolidating multiple debts into one), small business, etc. Credit card is better for smaller expenses like purchasing white goods, furniture, small office equipment, gadgets, etc. Depending on your financial need, opt for either a personal loan or a credit card. Of course, for even bigger expenses like owning a car, purchasing a home, and paying education costs, you can take a car loan, home loan, and an education loan, respectively.
● A health insurance policy will cover any hospitalisation cost incurred by the insured member during the policy term. In the case of a reimbursement claim, you will have to pay the medical bills out of your pocket at the time of discharge and later make a claim for reimbursement with your insurance company. In such a scenario, if you don’t have sufficient cash to pay your hospital bills upfront, you can opt for a low-interest rate personal loan to cover your medical expenses. Furthermore, there are over 100 non-payable items that are not covered under a health insurance policy. Here again, you can use a personal loan to pay the expenses that aren’t covered by your mediclaim policy like dental surgeries and eye treatments.
● Credit card companies charge a high interest rate on outstanding dues. Although credit cards are convenient and easier to obtain, defaulters better beware of the 30-40% interest rate on credit card outstanding dues. In no time, you may find yourself immersed in debt. On the other hand, with a personal loan, the interest rate remains fixed. What’s more, if you fail to make your credit card payments on time, you risk affecting your credit score negatively. The same is true for all types of loan EMI payments. A bad credit score can hamper your prospects of future loan approval. You must have a credit score of 750 or above to get instant loan approval.
● A comprehensive motor insurance policy will not only cover third-party damages but also damages to you and your vehicle. However, when the cost of your vehicle repairs exceeds the insurance limit, then a personal loan can come in handy. This is another financial contingency where you can use a personal loan (rather than a credit card) to pay for the damages to your car or bike.
In conclusion, a personal loan is better suited to help you meet any financial contingency if you are in the midst of a cash crunch. Personal loans are long-term financing options while credit cards are short-term financing options. Credit cards are ideal only if you can repay the cost of your purchases by the payment due date.
As personal loans are repaid in Equated Monthly Installments, it is wise to maintain a low debt-to-income ratio wherein your EMI payments don’t exceed more than 50% of your income. A high debt-to-income ratio is a surefire way to default on your personal loan. The same is applicable to car loans, home loans, and education loans.
How to apply for a personal loan?Before applying for a personal loan, check your personal loan eligibility so as to avoid rejection. Multiple loan rejections can negatively affect your credit score. Compare various personal loan offers across the top banks and choose one with the lowest interest rate and a suitable repayment period. Nowadays, you can apply for personal loans online with just a few clicks of your mouse from the comfort of your home. Just download the application form from the bank website, fill it up, and submit it along with the necessary documents such as identity proof, age proof, income proof, and address proof. The bank will verify your documents and process your personal loan application. Upon approval, the loan amount will be disbursed to your bank account within few hours.