You can understand the tendency to shop with credit card as it allows payment of virtually everything from grocery items to dining at expensive restaurants. Credit card has indeed become an integral part of our financial lives because of the convenience it offers. But the flip side of credit card is the interest rate of 30%-40% per annum that can make a deep hole into your pocket if you buy expensive items without taking your income and repayment capacity into consideration. And particularly when you purchase durable goods like washing machine, refrigerator, air conditioner, LED television, tablets and others, it will be better if you prefer consumer durable loan over credit card because of the comparative advantages that are mentioned below.
Lower interest rates
The interest rate on consumer durable loan ranges from 12%-22% per annum, lower than 20%-25% per annum charged on the credit card when you opt for EMI option. For example-If you buy the refrigerator costing Rs 50,000 on consumer durable loan with an interest rate of 16% per annum for a period of 1 year, then the EMI, interest and total amount payable will be Rs 4,537, Rs 4,439 and Rs 54,439, respectively. When you opt for credit card EMI option to buy the refrigerator at 20% interest rate, then EMI, interest payment and total amount payable will be Rs 4,632, 5,581 and Rs 55,581. You can see the difference as the option of consumer durable is cheaper than credit card EMI option. But if you pay directly from the credit card without using the EMI option, then you can expect to pay a hefty sum, almost 1.5 times more amount compared to the EMI option, making the credit card experience even more miserable here.
Pre-closure fee waiver
Generally, when you take the loan and repay it before the expiry of the tenure, then it accounts for pre-closure and thus bears some charges in the range of 2%-4% of principal outstanding at the time when it happens. But, there are many banks that do not charge on prepayment of consumer durable loan. Examples include Axis Bank, State Bank of India, etc. With no-prepayment charges, you can easily pay off the loan before the tenure and avoid the outflow of interest towards the loan. But such a facility is generally not available on credit card.
Durables that you can you buy
You can buy a series of consumer durables on credit card and consumer durable loan, such as
- Washing Machine
- Laptops and Ultra books
- Air conditioners
- High End Audio and Home Theatre Systems
- Modular Kitchen
- Mobile Phones
- High End Camera and Lenses
- LED Televisions
Calculations you need to make
Take into consideration the entire expenses that you have to make in a month and see the money that you can spend on those. Make sure you keep something for the emergency. Lastly, add all these amounts. The overall amount so obtained must be reasonably lower than your monthly income so that you can pay off the loan in a seamless manner.
(Updated on:2 November,2016)