Credit Cards Vs Short Term Loan: Knowing The Best Option In An Emergency
New Delhi: If unforeseen expenses can derail your finances, you are not alone. The recent economic crisis due to the coronavirus pandemic has caused an unexpected cash shortage among many due to pay cuts and job losses.
If you’re in a similar situation – either you don’t have enough savings to cover your financial emergency or you don’t want to touch the money in that account – two options to consider when you have a large expense to cover are a personal loan or a credit card.
Credit card loan
Credit card issuers offer pre-approved credit card loans to certain cardholders with good repayment history and a good credit profile. The pre-approved nature of credit card loans allows card issuers to typically disburse the loan amount within hours without any additional documentation. This makes credit card loans a great tool for dealing with financial demands or deficits.
While credit card loans are generally penalized against the cardholder’s available credit limit, some card issuers also offer an additional variant of credit card lending, which does not impact the cardholder’s available credit limit. their available credit limit.
But, what needs to be borne in mind is that the interest rates on credit cards are very high, usually 36-42%, which makes them extremely expensive if your dues are not. paid on time.
Short term loan
Typically, you can get a larger loan amount against a credit card limit (even for the same borrower profile), since credit cards are considered high risk by banks and other lenders. Repayments are made over a longer duration (like 3 to 12 months), unlike a credit card which operates on a monthly billing cycle and therefore keeps your cash outflows more balanced.
Very short term loans (duration less than 90 days) should be avoided as they are very expensive and can force you into debt.
What is the best option?
Credit cards come with a “minimum payment” option that can be used when you are running low on funds to pay off the bill in full. In case of loan, Equal Monthly Income (REM) must be paid.
Timely repayment of the loan amount increases the credit score of the consumer. However, you should also understand that borrowing is always serious business and bonds need to be paid off. Therefore, try to have healthy financial habits that help balance your immediate needs with your long-term earning capacity.