Emergencies often require liquid funds for which you can either get a Personal Loan or pay off with your credit card. Both avenues make cash accessible for you fairly instantly, but both also have a large interest component in the repayment amount.
Experts in the field recommend using a credit card for short-term debt. It is considered for people who don’t need longer tenures to pay off their debt. On the other hand, people who want a longer repayment tenure go for instant Personal Loans. All this boils down to the interest you will have to pay.
While both options are easily available, your initial task should be to find the lowest-cost option that allows you to cater to your needs without burning a hole in your pocket.
Personal Loans work best when you have a large expense, such as car repair, home renovations or even a wedding. You can also use a personal Loan to consolidate other high-interest debt into one single loan with a lower interest rate. A credit bureau Experian conducted a study in 2019 on why people take out Personal Loans. The results of this study were:
- 28% had to fund a purchase
- 26% had to consolidate debt
- 17% had to renovate their homes
- 9% had to refinance existing debt.
The remaining 30% had to pay for something not listed above.
Advantages of Personal Loans
- Lower interest rate: Unlike credit cards, Personal Loans offer lower interest rates and steady, even EMIs to pay off the debt. This predictability allows you to build your budget, and you know exactly when you will be debt-free.
- Wide range of uses: you can use a Personal Loan for just about anything except higher education and illegal activities. Each NBFC has a different loan disbursal policy, but some NBFCs offer instant Personal Loans.
Disadvantages of Personal Loans
- Not meant for frequent purchasing: You cannot avail of a Personal Loan to fund small, regular purchases. You can also apply for an instant personal loan when you only have to pay for 1-2 big purchases.
- No rewards: Unlike credit cards, Personal Loans are just a give and take of money. The NBFC does not offer any rewards on your loan application.
You can use a credit card to pay for smaller, recurring expenses that you can pay off relatively quickly. Experts also recommend paying off credit card bills before the due date to ensure you don’t default on them by mistake. Credit card companies charge interest only if you carry a balance from month to month. So, if you pay the debt off before the due date, you are essentially getting a free short-term loan to pay for your needs.
If you are disciplined enough, you can put all your spending on the credit card to avail of the benefits without paying any interest. It’s easy to spend more than what you can pay off, but remember that the subsequent rewards may not outweigh the interest you will have to bear.
Advantages & Disadvantages Of Credit Cards
- Earn rewards: if you pay off your monthly spending religiously each month, this card can be a great way to earn cashback or even travel rewards! Some people can pay for their vacations through these rewards.
- Cash backup: even if you choose not to put all your month’s expenses on the card, it can still be a good way to have something for backup for when things go wrong. A credit card can fill in if you don’t have an emergency fund and bridge the gap in case of unexpected expenses.
- Easy swiping: The ease of buying stuff by swiping your card can also be a great disadvantage. Because of this ease, many people fall into mounds of debt made worse by the minimum due amount, making it easy for people to forget about the interest they would pay if the debt amount was transferred to the next month.
- Long tenures: the minimum payment on credit cards means you would end up paying off the same balance for years. That’s assuming you don’t add any more charges to the card.
Instant Personal Loans and credit card loans are not one-size-fits-all decisions. Decide which payment method works best for you after evaluating your needs.