Personal loan, credit card or BNPL – Which is best to manage your needs

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Consumer behaviour and spending patterns have shifted post covid-19 pandemic. Millennials especially are increasingly looking at several micro-credit solutions to manage their needs and wants. One may want to take credit for vacations, big item purchases, or even for organising family functions among others. 

Adhil Shetty, CEO, BankBazaar.com, said, “Personal loans, credit cards, and now even Buy Now Pay Later (BNPL) can help you raise funds for needs and wants. When you think about the right financing option, you need to understand their commonalities and the differences that set them apart to make an informed decision. At the face of it, all three allow you to buy products on credit and repay as equated monthly instalments (EMIs). However, there are some critical distinctions that you must understand before availing any of them.”

When you avail of a personal loan, it comes directly to your bank account. You can use this amount for whatever wedding requirements you may have, from buying luxury items to boking air tickets for vacation. The repayment tenor is usually standard and spans 1-5 years. The interest rate can be anything from 10-20% per annum.

BNPL, on the other hand, can be used explicitly to make eligible purchases which can be split into easy instalments or repaid at a later date. BPNL could be the cheapest and easiest to access alternative, and you may be able to avail zero interest EMIs on BNPL. However, BNPL is still a growing segment and is predominantly available on e-commerce, food-ordering, ride-sharing, travel booking, online groceries, and services websites. This further means that BNPL may not be an end-to-end credit product you can use across all situations. However, with a bit of planning, you can use BNPL at places where it could give you the best benefits, such as your travel booking or other wedding related shopping.

Credit cards straddle the middle ground between personal loans and BNPL and have the ability to provide the best of both worlds. Shetty said, “You may be able to pay for all your expenses using your credit card provided you have the credit limit. The outstanding balance can then be converted to an EMI for 3-24 months, depending on the amount, the issuer, and other factors. However, this can be an expensive proposition, with interest rates touching 20%.”

What you should do

As mentioned above, the three most common ways of financing your needs and wants are conventional personal loans, borrowing with credit cards and the emerging trend of BNPL.

Abhishek Soni, CEO and Co-Founder of Upwards, said, “A personal loan is better when there are multi-fold expenses like going on long vacation clothing, tickets, hotel bookings etc.) to keep the repayments consolidated. Availing via BNPL or credit card might lead to a lot of small loans issues or high rate of interest, which is not ideal.”

Echoing similar views, Nitin Mathur, CEO, Tavaga Advisory Services, said, “Personal loans are more suited for big-ticket and all-purpose financing facilities. In comparison, the BNPL option is preferred for small ticket sized purchases of up to 1 lakh and the credit card limits are determined by the borrower’s bank depending on a predetermined analysis.”

Mint takeaway

While all three are viable sources of funding your needs and wants, you have to choose between them based on your eligibility, requirement, cost, the utility of the funds and most importantly, your repayment capacity. Bear in mind that all three carry heavy penalties in case of late or missed repayments and can have a severe impact on your credit score as well. So have a repayment plan before you borrow, do not apply for credit indiscriminately, and borrow that much what you can pay back comfortably.

Besides, it is also crucial for one to start saving for financial goals and not burden himself/herself with loan repayments and EMIs.

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