Personal Loans vs. Credit Cards: Which Option is Better in a Financial Crunch?

When you're hit with an unexpected financial crunch, the decision to rely on either a personal loan or a credit card often arises. Both options offer quick access to funds, but choosing the right one depends on factors like the amount you need, interest rates, and your ability to repay. Let’s break down the differences to help you make the best choice in a financial emergency.

Personal loans are a kind of unsecured loan provided either by banks or NBFCs, usually for bigger expenses like medical bills, home repairs, or weddings.

They are repaid in fixed monthly instalments, normally throughout 1 to 5 years, thus making them ideal for larger and planned expenses. On the other hand, credit cards extend a revolving type of credit that carries an interest-free period of 20 to 50 days. In case this is not paid out within this window, the interest charges apply, which are very high.

This basically pertains to personal loans having more feasible rates of interest when it comes to large quantities since rates normally range between 10 percent to 20 percent per year; whereas with credit cards, the steep interest rates surge from a minimum of 24 percent per annum up to even as high as 42 percent yearly. It can be a low-cost solution if one can repay the outstanding amount in the interest-free period; otherwise, if the amount is big or you are unable to pay it off during the time, then a personal loan is less expensive. As far as the amount lent is concerned, personal loans are more lenient, and these range from ₹ 50,000 up to ₹ 25 lakh. For its part, credit cards allow for lower credit limits, a function of one's income and credit score; this will make them very ideal in case of relatively smaller and less enduring needs.

The differences are also available in terms of repayment. A personal loan is provided with fixed return tenure, and the tenures mostly range from 1 to 5 years. Therefore, you would precisely know how much you would be paying per month. Predictability of return helps keep within a budget and ensures that debt becomes crystal clear within a stipulated time. A credit card doesn't have any stipulated limit for returns. While you can opt to make minimum payments, it is akin to carrying the balance forward and incurring high-interest charges.

Conclusion

When does a person apply for each option? And if you need a larger amount to cover a big expense and can commit to a fixed repayment schedule, then, in general, a personal loan is better. It provides lower interest rates and, hence, manageable EMIs. If you can pay the balance within the interest-free period, not beyond, you could use a credit card for smaller, short-term expenses to avoid high-interest costs.