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Credit Card EMI vs P2P Loan: Which one should you opt for?

Credit cards can be extremely handy when it comes to making an impulsive high-ticket purchase.

, ET Online|
Updated: Oct 03, 2018, 12.10 PM IST
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Credit cards can be extremely handy when it comes to making an impulsive high-ticket purchase. All you have to do is to flash the card and walk away with your purchase. Many credit card companies would immediately offer you an option to pay back the money in equated monthly instalments or EMIs.

However, financial advisors often frown upon impulsive purchases using credit cards. “The habit of getting easy money (with a credit card) can lead you to a debt trap. The implications are much higher -- some like the rate of interest can be quantified, but the effects on (financial) habits cannot be quantified,” says Hemant Rustagi, CEO, Wiseinvest Advisors.

That is why most financial experts ask individuals to make a financial plan to take care of their large purchases. If it can’t wait, it is better to opt for a personal loan, they say. “When you take a loan, it’s a conscious effort. You will hesitate to take the next loan, which is not the case with credit cards,” adds Rustagi.

Compared to credit cards, personal loans can be cheaper. “Credit cards can charge somewhere around 0.1% every day. Making the annual charges go up to 36% in some cases,” says Tanwir Alam, Founder & CEO, Fincart.

Do you have trouble getting a personal loan from a bank? Try a peer-2-peer lending platform. The peer-to-peer (P2P) lending platforms have a different mechanism for assessing the loan eligibility.

P2P loans, unlike the usual bank loans, offer short-term tenures starting 3-36 months and can be looked as an alternative to credit cards, depending on the requirement of the borrower. The interest rates are anywhere between 12 and 28%.

“P2P loans can be a good option to raise quick money,” feels Alam. “Credit cards normally have a 30-day billing cycle and a 20-day repayment period. Which means you have to make the first repayment within 20 days of swiping your card to avoid extra charges. Any delay in making a repayment can cost you dearly,” adds Alam.

How do you decide whether you should swipe your credit card or opt for an online lending platform to fund your purchase? “The decision to take a loan or use a credit card would depend on the type of purchase and the amount. For expenses of up to Rs 1 lakh, a credit card option can be preferred. However, for expenses above Rs 1 lakh, one can go for taking a personal loan since the average credit limit is around Rs 2-3 lakh,” says Kalpesh Ashar, Financial Planner and Author of “Yours Financially- Life, Finance and Films!.

Most financial experts ET Online spoke to hold the view that personal loans and credit cards should be used only in case of emergencies. And even while opting for them, it’s important to go through the terms and conditions to avoid paying extra cost on the same.

“Credit cards and personal loans are both unsecured and may give an indication to a bank that the borrower is needy for money, when applying for a loan with a bank. Important is to prevent oneself from getting into a habit,” says financial advisor Amit Kukreja.

Credit card is useful in building a CIBIL score but comes with its own set of risks. On the other hand, P2P loans offer benefits like zero pre-closure charges. Read here: Seven benefits of P2P loans

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