Credit Card vs Personal Loan: Which is Cheaper for Big Purchases?
Credit Card vs Personal Loan:- When making big purchases, choosing between a credit card and a personal loan can significantly impact your overall costs. While both financing options allow you to make purchases without immediate payment, they differ in terms of interest rates, repayment structures, and financial impact. Here’s a detailed breakdown of the costs associated with both.
1. Interest Rates: How Much You Pay for Borrowing?
- Credit Cards: Interest rates typically range between 10% and 18% per annum, depending on the issuer and the type of card. However, if you only pay the minimum amount due, the remaining balance incurs high interest, which is compounded monthly, increasing overall debt.
- Personal Loans: Interest rates are usually lower than credit cards, typically ranging from 13% to 22% per annum. Unlike credit cards, personal loans follow a reducing balance method, meaning interest is charged only on the outstanding principal, making repayments more cost-effective.
💡 Verdict: If you plan to carry a balance for an extended period, a personal loan is cheaper due to lower interest rates and a structured repayment plan.
2. Loan Tenure: How Long Do You Have to Repay?
- Credit Cards: These operate on a revolving credit basis, meaning you can continue using them as long as you make minimum payments. There is no fixed repayment term, and paying off balances quickly can reduce interest payments.
- Personal Loans: These have a fixed tenure (typically 1 to 5 years) and are repaid through monthly EMIs (Equated Monthly Installments). You cannot reuse the credit once repaid, unlike credit cards.
💡 Verdict: If you need a long-term structured plan for repayments, a personal loan is better. If flexibility is your priority, credit cards allow continuous use.
3. Approval Time & Accessibility
- Credit Cards: The application process is typically instant for pre-approved cards or can take 1-2 business days if new documentation is needed.
- Personal Loans: Requires more documentation (income proof, salary slips, credit score checks) and takes 3-5 business days for approval.
💡 Verdict: Credit cards win if you need immediate access to funds. Personal loans take longer but allow higher loan amounts.
4. Loan Amount: How Much Can You Borrow?
- Credit Cards: The limit is pre-set based on your income and credit score. Limits may vary between $1,000 to $20,000, making them best for small-to-moderate expenses.
- Personal Loans: Allows higher borrowing amounts, typically ranging from $2,000 to $100,000, making them ideal for big-ticket purchases.
💡 Verdict: If you need a large amount, a personal loan is the better choice.
5. Repayment Structure: How Do You Pay It Back?
- Credit Cards: Require monthly minimum payments (usually 5% of the total balance) but charge high interest if the balance is not paid in full.
- Personal Loans: Repayments are fixed monthly EMIs, meaning the cost is predictable and manageable.
💡 Verdict: If you prefer structured payments, a personal loan is easier to manage.
6. Overall Cost & Best Use Cases
- Credit Cards: Ideal for short-term expenses, emergencies, and frequent purchases. If used responsibly and paid in full each month, they provide interest-free financing.
- Personal Loans: Best for one-time, large purchases like home renovations, weddings, or debt consolidation, where structured repayments lower overall interest costs.
💡 Verdict: Credit cards are cost-effective only when paid off fully every month. Personal loans are cheaper for large expenses spread over time.
Conclusion: Which is Cheaper for Big Purchases?
If your goal is long-term affordability, a personal loan is generally the cheaper option due to lower interest rates and fixed repayments. However, if you have a strong repayment discipline and can pay off your balance in full every month, then a credit card can provide flexibility with zero interest.