Personal Loan vs Credit Card: Financing Your Big-Ticket Buys

When making large purchases, many people wonder whether a personal loan or a credit card is the better option. Both financing methods come with unique advantages and drawbacks. Understanding these can help you choose the best option for large purchases based on your financial situation and needs. Let’s explore the benefits of both choices in detail and see how Airtel Finance can help you make the right decision.

Understanding Personal Loans

A personal loan is a type of unsecured loan that you can use for various purposes, such as home renovations, debt consolidation, or major purchases. Here are the key features of personal loans:

• Fixed monthly payments, making budgeting easier
• Interest rates based on your credit score and the lender are generally lower than credit cards
• Repayment terms typically range from one to seven years

Pros of Personal Loans

When considering a personal loan to a credit card, personal loans tend to offer more predictable terms:

1. Predictable payments facilitate better financial planning
2. Lower interest rates compared to credit cards for those with good credit
3. Suitable for large, one-time expenses

Cons of Personal Loans

1. Requires a good credit score to secure favourable terms
2. Less flexibility in the repayment schedule compared to credit cards

To illustrate, let’s say you want to purchase a new home appliance worth ₹50,000. With a personal loan at an interest rate of 12.75% and a 3-year repayment term, your monthly EMI would be approximately ₹1,764. This fixed payment makes it easier to plan your budget.

Understanding Credit Cards

A credit card offers revolving credit, allowing you to borrow, repay, and reuse your credit limit. Here are the key features of credit cards:

• Higher interest rates than personal loans, but avoidable if you pay your balance in full each month
• Rewards and perks such as cashback, points, or travel miles
• Flexibility for small, everyday expenses

Pros of Credit Cards

1. Offers flexibility and rewards for your spending
2. If you’re able to pay off the balance within the interest-free period, credit cards can be the best option for large purchases.
3. Easier to qualify for compared to personal loans

Cons of Credit Cards

1. Higher interest rates if you carry a balance from month to month
2. Potential for high-cost debt accumulation if not managed responsibly

For example, if you use your credit card to purchase a ₹50,000 appliance and plan to pay it off over 12 months with an interest rate of 24%, your monthly payment would be around ₹4,600. However, if you can pay off the balance within an interest-free period, you could save on interest charges.

Personal Loan vs Credit Card: Which is the Best Option for Large Purchases?

When it comes to financing big expenses, both personal loans and credit cards have their strengths and weaknesses.

Personal Loans for Large Purchases

• Advantages: Fixed interest rates and repayment terms make budgeting simpler. Personal loans often have lower interest rates than credit cards, especially for those with good credit.
• Disadvantages: Less flexible than credit cards, and you can’t borrow more without applying for another loan.

Credit Cards for Large Purchases

• Advantages: If you can pay off the balance within an introductory interest-free period, credit cards can be a great option for financing big expenses. They also offer rewards and flexibility.
• Disadvantages: Interest rates are typically higher, and accumulating debt can lead to financial strain.

Factors to Consider When Choosing Between Personal Loans and Credit Cards

1. Credit Score: A higher credit score can secure better terms on both personal loans and credit cards. Check your credit score to understand your options.
2. Interest Rates: Compare rates for both options; personal loans often offer lower rates for large purchases.
3. Repayment Preferences: Fixed payments with personal loans or flexible payments with credit cards — choose based on your financial management style.
4. Rewards and Perks: If you value credit card rewards and can pay off your balance promptly, a credit card might be more appealing.

Real-Life Scenarios: Personal Loan vs Credit Card

Here are two real-life examples that illustrate when you might choose between a personal loan or a credit card for financing big expenses.

Scenario 1: Home Renovation

Suppose you’re planning a home renovation that costs ₹5 lakhs. A personal loan with a 5-year term and a 12.75% interest rate would result in a monthly EMI of approximately ₹10,877. This fixed payment can help you plan your budget effectively.

In contrast, using a credit card with a 24% interest rate and paying ₹20,000 per month would take about 32 months to pay off the ₹5 lakh renovation cost, with total interest charges of around ₹1.4 lakhs.

In this case, Airtel Finance would recommend a personal loan due to its lower interest rate and structured repayment plan.

Scenario 2: Purchasing a High-End Gadget

If you want to buy a high-end smartphone worth ₹1 lakh, using a credit card with an introductory 0% APR for 12 months could be a smart choice. By paying approximately ₹8,333 per month, you can pay off the purchase without incurring any interest charges.

A personal loan for the same amount with a 3-year term and a 14% interest rate would result in an EMI of around ₹3,300. However, you’d end up paying about ₹18,800 in total interest charges over the loan tenure.

For short-term, interest-free financing, a credit card might be the best option for large purchases in this scenario.

Final Thoughts

When it comes to financing large purchases, both personal loans and credit cards have their merits and drawbacks. Personal loans offer lower interest rates and fixed repayment terms, making them suitable for planned expenses. Credit cards provide flexibility and potential rewards but come with higher interest rates and the risk of accumulating debt.

Ultimately, the best option depends on your specific financial situation, credit profile, and repayment ability. If you’re leaning towards a personal loan, check your eligibility and compare interest rates from different lenders to find the best option for large purchases. Don’t forget to prepare the necessary documents for a smooth application process.

To explore your options, Airtel Finance offers a range of personal loan and credit card products tailored to meet your needs. Download the Airtel Thanks App today to learn more and find the best option for large purchases that suits your financial goals. Whether you’re considering a personal loan or a credit card, Airtel Finance can help guide you in making an informed decision.

FAQs

1. What is the main difference between a personal loan and a credit card?

A personal loan offers a fixed amount of money with a structured repayment plan, while a credit card provides revolving credit with flexible repayment options.

2. Can I use a personal loan for any purpose?

Yes, personal loans are versatile and can be used for various purposes, such as debt consolidation, home improvements, or large purchases.

3. How does my credit score affect my personal loan and credit card options?

A higher credit score generally qualifies you for better interest rates and terms on both personal loans and credit cards.

4. Is it better to use a personal loan or a credit card for debt consolidation?

Personal loans often have lower interest rates than credit cards, making them a better choice for consolidating high-interest debts.

5. Can I get rewards or cashback with a personal loan?

Unlike credit cards, personal loans do not typically offer rewards or cashback. They are primarily used for financing purposes.