It doesn’t matter whether you’re a salaried employee with steady paychecks or a self-employed professional managing your own business, we all seek the help of credit products like loans and credit cards to meet various needs. Credit card loans are instant while loans from NBFCs may take a few days to be processed and disbursed. Similarly, credit card loans have a higher rate of interest while loans from NBFCs come with lower interest rates.
Loans from NBFCs have grown exponentially owing to their hassle-free application process. NBFCs are able to process loans quickly and give you better loan amounts and interest rates compared to traditional banks. At the same time, more and more credit cards have been issued in recent times, increasing the overall market share of credit cards in the country. The eligibility criteria to get a credit card have been greatly relaxed allowing low-income earners too to get a credit card.
There are pros and cons to both these loan types. Let us have a detailed look into some of the advantages and disadvantages of getting a loan from a credit card vs a loan from NBFCs.
1. Ease Of Getting The Loan
A credit card loan is instant. You just have to use the credit card for your purchase, or you can walk into the nearest ATM and withdraw cash from your credit card. In case of an emergency, this is the quickest way to arrange funds.
A loan from NBFC is also quick but may take a few days. Most NBFCs promise loan disbursal within 24 hours when all documents are in order. Still, it is not instant, like a credit card loan.
2. Interest Rate
The credit card loan interest rate is naturally higher. They charge anywhere between 30-50% per annum. When translated to the monthly rate, it is about 2.5-4%, which may seem a lower rate when you are repaying it within months. But, if you fail to pay it back in full, there will be other charges like late fees, over-limit charges, interest charges and more, which makes credit card loans very expensive.
Loans from NBFCs generally have an interest rate of 10-18% which is way lower than credit card loans. It results in a lower EMI amount which can pay comfortably. These loans also have other charges like late payment charges, ECS bounce charges or other charges if you default on payments.
3. Documentation
Documentation is a nightmare for loan applicants. You are required to submit so many documents to get a loan. Credit card loans are not like that. You just have to submit documents at the beginning, to get a credit card. After that, you can use your credit card any number of times. You don’t have to submit documents every time.
But loans from NBFCs require exhaustive documentation to process the loan. You have to submit documents for every loan you apply for. This is a tedious process and many borrowers are wary of going to NBFCs for this reason alone.
4. Charges and Fees
Credit card loans usually don’t have any fees or charges to use them. Many credit cards even offer nil annual fees or joining fees so that is an added advantage. You don’t have to pay any charges for using your credit card to make a purchase. Withdrawing cash from an ATM attracts cash withdrawal charges. And if you don’t repay the loan amount in full the next month, you may be charged hefty interest charges.
Loans from NBFCs will have processing charges, which are a percentage of your loan amount. This ranges somewhere between 0.5 – 2% of the loan amount. They may charge a few other fees like documentation charges or administration costs, etc., but they are a small amount. They too charge later payment penalties or ECS bounce charges in case of a payment default.
5. Repayment Tenure
This is an important aspect to consider. Credit cards usually come with lower repayment tenure. The interest-free period for a credit card is only the billing cycle period. You are required to repay the entire amount in the next bill if you don’t want to attract any interest charges. You could choose the EMI option, which allows repayment in up to 24 EMIs but you have to bear the interest charges. And if your loan amount is huge, the 24 EMIs will be a large amount to repay every month. So credit card loans are good for lower amounts.
Loans from NBFCs gives you a longer repayment tenure. Personal loans have tenures of up to 5 years while vehicle loans or home loans have much longer tenures. This results in a lower EMI amount which you can repay comfortably. This also allows you to plan your monthly budgeting accordingly. So NBFCs are good for higher loan amounts.
6. Credit Score
Many people don’t pay attention to this point but this is equally important. Your credit score is checked only once when you are applying for a credit card. After that, you can just use your credit card based on the available credit limit. The lender doesn’t check your credit score every time you make a purchase through your credit card. So, credit card loans are better for people with not so great credit scores.
But loans from NBFCs, on the other hand, check your credit score every time you apply for a loan. If your credit score is not great, your loan may be rejected. Also, multiple credit checks will have a negative impact on your credit score. Even if you get approved for a loan, in spite of a low credit score, the loan terms may not be that great. You may end up with a lower loan amount and higher interest rate. So, if your credit score is low, you have to take some time to improve it before you apply for a loan or end up with unfavourable loan terms.
Conclusion: Which is the Better Choice?
Whether it is a credit card loan or a loan from an NBFC, they are long term financial commitments that require disciplined debt management. Defaulting or late payments can seriously impede your future loan prospects. There are a number of loan products in today’s market. Take some time to shop around and find the best product to suit your needs. Look into aspects like interest rates, repayment tenure and other value adds that you may get.
