Instant loan or credit card loan: which is the best option for you?
Instant loans and credit cards are essential financial products. However, there are a few things you should keep in mind before jumping into any of them.
As consumers, we all need credit at some point. It provides us with the necessary monetary leverage and helps manage our financial crisis. As with everything else, credit and its terms can be structured into multiple terms, representations, and provisions. So does it just come down to picking the lender that offers the lowest interest rate? Usually this is not the case.
Before focusing on an offer, there are various considerations; one of the main ones being whether to get an instant loan from alternative lenders or a credit card. Credit provisions are almost the same when both agreements involve loan limits, late fees, underwriting requirements and more. But despite the apparent similarity, there are many differences when we analyze the attributes of instant loans and credit cards individually. So how do they compare to each other? Let’s find out!
This is one of the biggest differences between instant loans and credit cards. Usually, the credit limit of a credit card is two or three times your monthly salary. So, if your salary is Rs 40,000 per month, your credit limit will be either Rs 80,000 or Rs 1.20,000.
Instant loans, however, do not have a similar rule. Unlike credit card loans, your salary is not the sole determinant of the instant loan amount. Here, your debt ratio, job stability, credit score, and various other factors will also be considered. The amount of the promissory note of these loans is therefore much higher. Most alternative lenders offer instant loans ranging from Rs 1 lakh to Rs 15,00,000.
So, if you’re looking to finance a major expense, it’s best to settle with an instant loan rather than a credit card.
When you plan to buy something with a credit card, you can only use it with lenders who accept the card. This limits your purchases to some extent as you still cannot access cash.
Since instant loans have no such option, you can use your funds anywhere. So whether you’re looking to repair your home, pay your rental deposit, buy a used car or consolidate your existing debt; you can do it all with an instant loan. Since the loan amount is available in your bank account, there is no limitation on how you use it.
Installment debt and revolving debt
While instant loans and credit cards deal with debts, the nature of those debts is entirely different. Credit cards are associated with revolving debt while instant loans are associated with installment debt.
Unlike installment debt which involves paying a fixed monthly installment, revolving debt is for an indefinite term where the interest rate changes based on your monthly contributions. So, if you have a credit card with a limit of Rs 1,00,000 and your outstanding dues are 90,000, your card is almost about to be maxed out. The result: your monthly interest rate will be higher and will fluctuate until you pay off your debts. Since installment debt involves fixed installments, the interest rate will not be affected even if you have dues of Rs 90,000 on your loan worth Rs 1,00,000.
Another major difference between credit cards and instant loans is their term. Since credit cards are mainly designed for small purchases, their duration varies from 30 to 45 days. If you cannot pay your dues during this term, a high rate of interest will be charged on the unpaid amount.
Instant loans, however, have relatively flexible terms. Since the ticket size of these loans is higher, the repayment window ranges from 1 year to 6 years. This way you have enough time to pay your dues without eating into your savings.
Instant loans and credit cards are essential financial products. However, if you are looking for more funds in a longer time frame, it is better to choose the former.
(By Aditya Kumar, Co-Founder and CEO, Qbera)
(Disclaimer: These are the personal opinions of the author)
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