Having a credit card gives you the freedom to spend without reason. This can lead to a pile up in credit card debt. While some people tend to be more judicious with their spending, others consider a credit card as an extension of their income and spend than they can handle. If you fall under the latter group and are struggling to clear your debt, there’s still no cause for alarm. Personal loans serve as a very good alternative under such cases. Here are a few reasons why:
The first and the most important reason why a personal loan is better to credit card debt is the interest rate involved. To begin with, a credit card is another form of a loan, and the main difference between this and other forms of loan is that the usage and the repayment is a continuous process. Also, credit cards come with an Annual Percentage Rate (APR) that range between 35% - 45%, bringing the effective monthly interest rate from 2.9% to 3.75%, which is incredibly expensive.
On the other hand, a personal loan is available are interest rates as low as 12% from some lenders, with the highest going up to 28% in rare cases. In comparison to credit cards, the effective interest rates go from 1% to 2.33% a month.
Imagine you had multiple credit cards and each of them a lot of outstanding balance to be cleared, you would have to shell out a considerably large amount each month even if you were paying the bare minimum. When you get a personal loan, all your multiple payments can be turned into a single payment. This helps keep track of how much money you owe the bank, and saves you the trouble of juggling between multiple cards and their payment schedules.
This is yet another advantage of having a personal loan in order to clear your debt. A credit card keeps collecting interest once you get past the interest-free period, and it does so on a daily basis. This means that the longer you take to clear your bill, the more interest it will accrue, and the more pressure you will be under to clear it. Let’s take an example: You have a card with an APR of 39%. Your outstanding amount is Rs.40,000 and the minimum payment, which is 5%, is Rs.2,000. After a year, the interest on your credit card will be Rs.15,500.
This means you will need to pay the previously mentioned amount along with the Rs.40,000, which brings your total up to Rs.55,500. A personal loan will have fixed EMIs for the period you have chosen will also give you a better time limit to repay the loan.
When you are at a stage where you are looking at better options to clear your credit card debt, there’s a definite chance you will have harmed your credit score. However, choosing a personal loan can be a source of damage limitation. Rather than being your credit score by a large margin, this option will give you the easy way out and also helps you nurse your CIBIL score back to its good health, as long as you keep making timely payments on your loan.
Here are some of the things you need to keep in mind before applying for a personal loan:
There are plenty of banks and NBFCs that offer personal loan these days, hence there’s a lot of competition in the market to offer competitive rates and get customers. So, instead of taking a loan from the first lender you approach, make sure to check out a number of options before applying for one.
Every lender these days are offering accidental cover and other such insurance options along with their loan. They also market them as a minimal expenditure for you. But, the case is entirely differently. While availing it initially will come cheap, you will then need to pay the premiums and other related costs, which the lender will add to your EMIs. So, if you have such options available, make sure to opt out of them.
There are two interest rates available with regards to personal loan, flat interest rate or reducing balance interest rate. Make sure to not for go for the former as it isn’t what it appears to be. You will repay your principal every month bit by bit, but a flat rate interest doesn’t take that into account and will instead require you to pay the same interest till you clear the loan.
A personal loan, like all other loans, comes with a number of charges including processing fees, prepayments fees, late payment fees, etc., make sure to keep yourself informed about all these costs before crossing your t’s and dotting your i’s.
Depending on your salary, you may be eligible for a higher loan amount than you are looking for. Don’t get tempted by the higher number, make sure to borrow only the amount that you require.