Choose Your Financial Tool Wisely: Credit Card or Personal Loan

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You can always be spoilt of choices to meet your immediate financial requirements such as day-to-day expenses, spending for emergencies and special occasions, etc. Choices can be in the form of taking money from friends and relatives, money lenders or the mediclaim policy. But these options may not be beneficial all the times. So you turn to prominent options of credit card and personal loan Today, we are going to discuss the salient features, benefits as well as pitfalls of both lending options. First start with credit card.

Credit card

Credit card is a cashless instrument that allows you to make payments for utility bills, online and offline shopping, travel tickets and plenty more. You can avail credit limit of up to Rs 2 lakhs according to various categories. Typically, you will find signature, platinum and silver credit cards across most banks in India. Let’s discuss the benefits of credit cards in the points mentioned below.

Benefits

  • In the case of unforeseen circumstances such as medical emergencies and job loss, credit cards can come to your rescue
  • You can use it everywhere in India and overseas
  • You can purchase products and make payment in Equated Monthly Instalments (EMIs)
  • Also you can take advantage of discounts while shopping in stores as well as online
  • You can gain reward points on the purchases made through credit card. Accumulation of these points can help you get free airline tickets and others.
  • Cash back facility is also available on certain cards
  • Paying the dues on time can bolster your credit history
  • Nominal fee is charged in the form of processing fee
  • You can resolve the situation of defective merchandise and billing discrepancies

Don’t get too influenced by the advantages as you have to consider the demerits of credit card as well to arrive at a better conclusion. Brace up yourself to read some disadvantages, and here are they.

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Pitfalls

  • Credit card can land you in big trouble if not used properly
  • Often people commit the mistake of spending more than that they actually have and ending up worsening the credit score as well as their financial position
  • Be ready to face the music of interest and late fees in the event of you defaulting on credit card payments.
  • Also, there have been growing instances of credit cards frauds across India, and you may have to pay a heavy price even if you get slightly complacent in its use

After discussing the benefits and pitfalls of credit cards, let’s turn our head to personal loan.

Personal loan

Personal loan as the name suggests is a credit extended by banks and other financial institutions for personal use, marriage, education expenses and medical emergencies. The loan can be extended up to Rs 20-25 lacs, with interest rate ranging between 13-24%. Let’s just glance through the advantages of personal loan in the points below.

Benefits

  • Personal loan is a multi-purpose lending to serve purposes such as medical expenses, travel costs, buying jewellery or other accessories, etc
  • What keeps the game in favour of personal loan is its faster accessibility as you can obtain it from 24-72 hours, making it ideal for people looking to get emergency funds
  • Personal loan does not require much documentation as opposed to car loan or home loan
  • There is no requirement of any collateral or security to procure personal loan

You may access personal loan very quickly, but there are certain disadvantages that one must be wary of before availing this option. Keep an eye on the demerits highlighted in the points below

  • Be prepared to shell out more as the interest rate is quite high on personal loan. Rate ranges from 13-24 per cent, making it a costlier affair.
  • Part payments can be costly as you will have to pay 2-4 per cent of the loan amount as prepayment charges
  • If you do not have a good credit rating, lenders will hesitate to extend personal loan as it is quite risky
  • At times you can get personal loan from banks even if you have a bad credit rating. But you will be required to pay higher interest rate much unlike the ones with a good credit history.
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Table showing amount limit, interest rate, processing fee, prepayment charges and repayment options of personal loan

Bank NamePersonal Loan LimitInterest RateProcessing FeesPrepayment ChargesRepayment options 
ICICI BankRs 20 lacs13.49 -17.50%Up to 2.50% of loan amount plus service tax5% of principal outstanding plus service tax1-5 years
HDFC BankRs 15 lacs12.75-19.50%2% of loan amount4% of outstanding principal1-5 years
Axis BankRs 15 lacs15.5- 24%1.50% to 2.00% + Service Tax as applicableNil1-5 years
Kotak BankRs 20 lacs13.90-20%2% of loan amount, an individual has to pay 0.5 per cent upfront at the time of submitting the applicationLock in period for 12 months1-5 years
State Bank of IndiaRs 10 lacs12.70-17.80%2.02-3.03% of the loan amountNilUp to 4 years

Table showing fees and charges of signature credit cards of various banks

Signature CardJoining FeeAnnual FeeAnnual Fee (2nd Year onwards)Overdue interest on extended creditInterest on cash advancesReward Points 
ICICI BankRs.25000Nil Rs.2,000Monthly rate-3.4%Monthly rate-3.4%Minimum reward points on every Rs 100 spend is Rs 1 with a maximum of Rs 5
HDFC BankAs applicable by the bank As applicable by the bankAs applicable by the bankMonthly rate-2.5% to a minimum amount of Rs 500Monthly rate of 2.5% to a minimum amount of Rs 300 2 reward points on spend of Rs 150. 50% additional reward points for incremental spends above Rs 75,000 in a statement cycle
Axis BankRs.5000NilAs applicable by the bank3% with a minimum amount of Rs 5002.5% with a minimum amount of Rs 250Earn 10 & 20 reward points on local and international spends of Rs 200 each, respectively
Kotak BankRs.19,999 As applicable by the bankAs applicable by the bankMinimum of Rs 500Minimum of Rs 300Earn 10X points for spend of every Rs. 100/ across select VISA merchant categories for purchasing air-tickets, holidays, shopping of apparels/electronics and all international spends
State Bank of IndiaOne time fee of Rs 4,999NilRs.4,9993.35% per month to a minimum of Rs 200+taxes if any3.35% per month20K reward points as welcome gift, annual reward points of 5,000 as card anniversary gift, earn 20 reward points on every Rs 100 spend on air tickets
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Now you have got all the details to take a call on the options. In nutshell, all one can say from the above that credit card offers more benefits than personal loan in terms of interest rate, EMIs, etc. It is a better option if you want credit of say Rs 2 lakhs. But if you want in excess of that amount, you can go for personal loan as banks can extend it up to Rs 20-25 lacs depending on your income and other details.

(Updated on:21st October,2016)