Personal loan vs credit card vs BNPL- Knowing what is the right financing option
New Delhi: Since most people were confined to their homes due to the pandemic, they are now moving and going on vacation or attending family functions like weddings. Those who have no savings or who have used up their savings because of the pandemic are now granting themselves credit to meet their financial needs. The most common sources of credit today are a personal loan, credit card, or Buy It Now and Pay Later (BNPL).
Personal loans, credit cards, and now even Buy Now Pay Later (BNPL) can help you raise funds to meet your needs and wants. When thinking about the right financing option, you need to understand their commonalities and the differences that set them apart to make an informed decision. A priori, all three allow you to buy products on credit and repay by equivalent monthly payments (EMI). However, there are some essential distinctions that you should understand before taking advantage of any of them.
Personal loan vs credit card vs BNPL
In the case of a personal loan, the advantage is that you get the entire amount in your bank account and can spend it as you need. Either you buy plane tickets, spend them on vacation, or use them for a family function like a wedding. In addition, you have a period of 1 to 5 years to repay the loan via equivalent monthly payments (EMI). The interest rate on personal loans can vary between 10% and 20% depending on your job profile and your credit rating.
BNPL, a benefit primarily provided by e-commerce platforms for making large purchases, is a relatively new concept. Most e-commerce platforms offer BNPL interest-free facilities if you choose a repayment term of three or six months. But for higher terms, you have to pay interest between 13 and 18%. Experts say this is the best option for making large purchases if you get free EMI. But BNPL cannot be used in all situations. For example, if you want to go on vacation, you need cash and BNPL may not be a good option for you. In these situations, your options are either a personal loan or a credit card.
Credit cards can come in handy in these situations. You can do most of your spending with your credit card, then convert all your unpaid bills into one loan and pay off the loan in IME for up to 24 months. However, these loans have a higher cost. Credit cards typically charge 15-20% annual interest for converting the overdue amount into an EMI facility.
What is the best option
Considering the characteristics of the three financing options, experts say that a personal loan is the best option because you get the cash on hand and the flexibility to spend that amount as needed. In addition, you benefit from more time for the repayment. Cost-wise, there can be a big difference between a credit card and a personal loan, but the flexibility offered by a personal loan is unmatched. However, if you want to make a specific large purchase like an air conditioner or other household appliance, BNPL is the best option if you get a zero cost EMI.