Buying ₹1 lakh iPhone? Should you use credit card or take a personal loan?

People have various credit options in the current financial world to manage expenses and achieve financial goals. Two of the most common forms of credit are personal loans and credit cards. This article discusses the suitable occasions for the use of credit cards and personal loans while providing information to empower you to make informed decisions.

Understanding credit cards and personal loans

• Credit cards: A credit card allows consumers to purchase goods and services up to a pre-set limit. They are flexible with respect to payments because you have the option to either pay the entire amount or to have a balance.
• Personal loans: Personal loans are offered by banks. These are to be repaid within a given duration in periodic monthly instalments. They are generally availed by borrowers for specific purposes and come with fixed rates of interest.

When to use a credit card?

1. Small expenses: The credit card is most appropriate for everyday, ordinary, small expenses that can be repaid within the 30- to 55-day interest-free period.
2. Earning rewards: Many credit cards provide reward schemes where the card user can earn money, travel miles, or points.

When to use a personal loan?

1. Planned purchases: Personal loans are beneficial for the most significant planned purchases, such as weddings, surgeries, or home improvements.
2. Debt consolidation: If you have several high-interest loans, consolidating your debt into one personal loan can help you save on interest.

Case study: Purchasing a high-value item

For instance, if you wish to purchase a ₹1,00,000 iPhone. You can either avail a personal loan of one lakh or make use of a credit card with a limit of one lakh. This is how you should decide:

Using a credit card:

• Interest-free period: Having a credit card is useful if it offers an interest-free period and you can repay the entire ₹1,00,000 within it.
• Consideration: To avoid paying high-interest charges, ensure that you have a clear plan to repay the amount in the interest-free period.

Using a personal loan:

• Fixed interest rate: A personal loan can prove to be cheaper if you take longer to repay the ₹1,00,000.
• Consideration: Remember that any charges or processing fees associated with the loan could add to the overall cost.

Can you pay ₹1 lakh through a credit card for an iPhone?

Yes, you can pay ₹1 lakh through a credit card for purchasing an iPhone, provided your credit card has a sufficient credit limit. Still, there are serious risks involved with using credit cards for making leisurely payments: 

1. High interest charges if not repaid within the interest-free period.
2. Increased credit utilisation, symbolic of credit hunger.
3. Such a purchase may lower your credit score.
4. Possibility of debt build-up if only minimum dues are repaid. 
5. Efficient planning is needed to manage such a purchase. 

Considerations before opting for a personal loan or credit card

1. Fees & charges: There can be annual fees, processing fees, or prepayment penalties associated with both credit cards and personal loans.
2. Impact on credit score: Having high outstanding amounts on a credit card and missing EMI payments on personal loans relative to their credit limit can have a detrimental effect on your credit score.

What does an expert say?

“Credit cards are ideal for small or recurring purchases like groceries, fuel, or online shopping, especially when you can repay the amount within the allowed days to avoid interest charges. On the other hand, personal loans are better suited for large, one-time expenses such as home, weddings, education, or consolidating existing debts. They typically offer lower interest rates compared to credit cards and come with fixed monthly repayments over a set tenure, which makes budgeting easier. In general, use a credit card for short-term, easily repayable expenses, and opt for a personal loan for long-term, higher-cost financial needs,” says Jai Kumar, Co-Founder of TechFini.

In conclusion, whether to use a credit card or a personal loan relies on the type of expense, your ability to repay, and your financial intentions. Making an informed decision means looking at your financial condition, knowing the terms, and comparing those terms to what you can repay. ​

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Disclaimer: Mint has a tie-up with fintechs for providing credit; you will need to share your information if you apply. These tie-ups do not influence our editorial content. This article only intends to educate and spread awareness about credit needs like loans, credit cards, and credit scores. Mint does not promote or encourage taking credit as it comes with a set of risks, such as high interest rates, hidden charges, etc. We advise investors to discuss with certified experts before taking any credit.