Home / Money / Personal Finance /  Personal loan or credit card: When should you opt for it?

Credit products like a personal loan and credit cards are unsecured loans which mean, the borrower doesn't have to mortgage their asset but needs a good credit score to avail the loan. In the case of a personal loan or borrowing against a credit card - how do you decide which is the right one for you?

"Well, if you have a large expense or purchase to make, for instance, medical bills, vehicle purchase, wedding, home renovation, etc., then there is the option of availing of a personal loan. It offers some benefits like low-interest rates, faster disbursal, no collateral, and easy repayment options, among others," said Anuj Kacker, Co-Founder, MoneyTap

This way, personal loans are generally less expensive than credit cards. They typically have a fixed repayment schedule, which is much more rigid than that of credit cards. Most lenders require additional documentation for a top-up or loan extension. Most lenders charge a fee for early foreclosure of your loan. So, a personal loan is a better option than a card for a well-anticipated purchase/ expenditure that you expect to repay in a planned or orderly way.

On the other hand, a credit card is one of the most convenient ways to borrow money for short term requirements. You can usually use these credit cards for smaller and recurring expenses like grocery or apparel shopping or buying gadgets. However, as convenient and straightforward as it may sound, paying off your credit card bills before the due date to prevent yourself from paying high interests is always recommended. This way it also positively affects your credit score if you can repay your credit card bills on time. If you are disciplined in using it, this credit solution can provide you with multiple rewards such as cashback, travel coupons, or free access to premium lounges.

The best part of the credit card is that it allows you an interest-free loan if the amount is repaid before the due date. The interest-free period is usually up to 45 days. Still, if the borrower fails to make full payment on the due date, the amount is carried forward. However, the interest charged is marginally higher than personal loans.

Prithvi Chandrasekhar, President, Risk and Analytics, InCred, said, "Credit cards are typically more expensive than personal loans in terms of interest rates, but are much more flexible. It is easy to repay as much as you can afford every month. You can take out an even bigger loan or prepay a loan with new application or foreclosure charges. You can continue to transact (i.e. spend at shops or online) on your card even while your loan is running. This flexibility can be valuable in uncertain times."

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