Personal Loan vs Credit Card: In today’s era, people often take loans to meet their financial needs. In this the use of personal loan credit card has become common. But the real problem starts when you are burdened with multiple types of debt at once. Suppose you have an outstanding credit card bill of Rs 2 lakh. Along with that you also have to pay a personal loan of 5 lakh rupees. When EMIs and huge bills come every month, the entire budget for the month gets ruined. In such a situation, the biggest question that arises is which loan should you pay first. Most people make decisions based on the loan amount. They feel that a loan of Rs 5 lakh is huge, so it should be closed first. But the opinion of financial experts is completely different. Experts believe that the loan repayment strategy should not depend only on the outstanding amount. Many things like interest rate, repayment terms, impact on your credit profile are important in this.
Your priority will determine the interest rate
The first rule of paying off any loan is to understand its interest rate. Credit card loans are much more expensive than personal loans. According to Raj P Narayanan, founder executive chairman of Zaggle, the decision should not be based on the balance but on the interest rate. Generally, interest on personal loans is 12 to 18 percent per annum. On the other hand, if there is an outstanding balance on the credit card, this charge increases significantly. If you don’t pay the card bill in full on time, it can charge a hefty interest of 36 to 42 percent per annum. Kapil Makhija, COO, Founder, Mini EMI.ai, says card debt adds up quickly. Therefore, Rs. 2 lakh credit card loan Rs. 5 lakh proves to be more expensive than a personal loan. Therefore, emphasis should be placed on eliminating high interest loans first. This should not be taken as an option but as a very important task.
Avoid the minimum payment trap
People who use credit cards often make a big mistake. When a big bill comes, people put down at least 5 percent of the amount. He feels that by doing this he has fulfilled his responsibility. Kapil Makhija says this is a big mistake. What happens in your mind is that you have paid the minimum balance, but the balance continues to accrue interest at the rate of 40 percent. This interest adds up so quickly that you get trapped in a spiral of debt that seems impossible to get out of. Therefore, one should always avoid paying only the minimum amount. Your goal should be to clear credit card debt straight away.
CIBIL score is affected
The way you repay your loan has a direct impact on your CIBIL score. Both personal loans and credit cards have different effects on your credit profile. If you use more than your credit card limit, it is considered high utilization. By maxing out your credit card limit every month, your credit score starts to drop quickly. On the other hand, the case of personal loans is slightly different. If you pay your personal loan EMIs on time every month, it strengthens your credit profile. Paying EMIs on time improves CIBIL score. Therefore, it is wise to let the personal loan EMI continue without any delay.
The smart way to get out of debt
It is very important to have a solid strategy to avoid financial stress. First, decide how much money you want to save each month. Save as much money as possible by cutting expenses from your budget. Deposit this remaining money or any bonus directly into your credit card bill. If you don’t have a lump sum and the credit card bill is too high, you can try another method. You can convert your heavy credit card dues into low interest EMIs. This will save you from the hefty interest of 40 percent and will make it easier to repay the loan.
