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Home / Money / Personal Finance /  Credit cards vs short term loan: Which one can be a good bet?

MUMBAI: Consumers/ households looking to manage their cash flow can choose between many kinds of convenient no-collateral lending products. They can either use their credit card or take a short-term loan to manage cashflows for a variety of reasons, including debt consolidation, emergency expenses, and home improvements, etc.

Anuj Kacker, co-founder MoneyTap said that credit cards can be dangerous sometimes, especially if you fail to repay your bill on time or you only pay the minimum amount, which leads the unpaid amount to be transferred to the next month along with a huge rate of interest. Apart from this, there is also a risk of credit card fraud and theft. On the other hand, when it comes to short term personal loans, you can get higher borrowing limits than a credit card. "But there’s a catch. Interest rates on these loans are low only if you have maintained a good credit score. There are other drawbacks, too, such as prepayment penalties, and the fact that you will eventually pay almost double the amount of loan taken, in the form of interests," he said.

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In this piece today, we take a look at the pros and cons of short term personal loans and credit cards.

Credit cards

Pros

Better for smaller expenses that can be paid via online transactions. Typically, most credit cards would come with a 30–50 day interest-free billing period, hence, there is no cost.

This is a revolving line so can be used over and over again.

Most credit cards also offer rewards on transactions that could be used for cash back, gift coupons, etc.

Always helps to have a credit card handy for any unplanned expenses.

With a good repayment track, the limits of cards get revised upwards automatically which is beneficial for the future.

Cons

Most credit cards don’t allow cash withdrawals or charge very hefty fees for the same.

Difficult to control the urge to spend and go overleveraged with a credit card which might lead to repayment issues in future.

Interest rates on credit cards are very high, typically 36-42%, which makes them extremely expensive if your dues are not paid on time.


Short term loans

Pros

Better for expenses that need to be paid in cash or lump sum

The borrowed amount and repayment duration is finite and capped; hence this controls unplanned and abrupt expenses (unlike a credit card).

Typically, you can get a larger amount of loan compared to a credit card limit (even for the same borrower profile) given credit cards are considered high risk by banks and other lenders.

Repayments happen over a longer tenure (like 3 to 12 months), unlike a credit card which runs on a monthly billing cycle and, therefore, keeps your cash outflows more balanced.

Credit card bills are levied with high-interest charges as compared to short term loans.

Cons

Extremely short term loans (less than 90-day duration) must be avoided as they are priced very steeply and can force you into a debt trap.

The loan is a one time solution i.e. every time you have a fresh fund requirement, you need to reapply for a loan and qualify again

Credit cards come with a 'minimum payment' option which can be used when you are short on funds to repay the bill in full. In case of a loan, the equated monthly income (EMI) must be paid.

Timely repayment of loan amount boosts the credit score of the consumer. However, you should also understand that borrowing is always a serious matter and that obligations have to be repaid. Therefore, one must try to have healthy financial habits that help balance your immediate needs with your long-term earning capacity.

Do you have a personal finance query? Send in your queries at mintmoney@livemint.com and get them answered by industry experts.

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