Taking a loan -- Which one should you choose - credit card EMI or personal loan?

In today's fast-paced financial landscape, consumers are often faced with a choice between credit card EMIs and personal loans when it comes to financing significant purchases. Credit card EMIs allow users to convert hefty credit card purchases into manageable monthly instalments, typically over a period of three to 24 months. This option is particularly convenient for those looking to quickly access funds without the hassle of extensive paperwork. However, the interest rates on credit card EMIs can range from 12% to 24%, making it a more expensive option compared to personal loans, particularly when prepayment fees are considered. 

On the other hand, personal loans offer a more structured repayment plan, often deemed more suitable for larger expenses. Such loans can be used for a variety of financial needs, from home renovations to education. Personal loans typically offer interest rates ranging from 10% to 31% annually, with tenures spanning up to 96 months. This longer repayment period allows for smaller monthly payments without affecting one's credit card limit, thus offering more financial flexibility. However, the approval process for personal loans is not immediate, as it requires eligibility checks and documentation, which can take several days. Additionally, processing fees ranging from 1% to 3% of the loan amount can add to the overall cost. 

Credit card vs personal loans

When deciding which option to pursue, several factors should be considered, including the urgency and scale of the expenditure. Credit card EMIs are often favoured for smaller, immediate purchases, especially if they qualify for no-cost or low-cost EMIs through partnerships with specific brands. This option is often more suitable for those who prioritise convenience and need rapid access to funds. However, the impact on the credit limit and the potential for higher interest rates make them less attractive for larger expenditures. 

In contrast, personal loans are better suited for larger financial needs due to their typically lower interest rates and longer repayment terms. They do not affect credit card limits, thereby maintaining financial flexibility. The higher borrowing limits — up to Rs 55 lakh — also make personal loans more appealing for significant investments. Yet, it's important to be aware of potential prepayment penalties that could reduce the loan's flexibility if early repayment is considered.

Ultimately, the decision between a credit card EMI and a personal loan should be guided by the specific financial situation and goals of the borrower. For those seeking quick and easy solutions for smaller purchases, credit card EMIs may be the preferred choice.

Conversely, for those needing more substantial funding with manageable long-term repayment options, personal loans might offer a more viable solution. Evaluating the costs, convenience, and potential impacts on future financial flexibility will guide consumers in making informed choices tailored to their individual needs.