Suppose you need to make an urgent repair in your house, which will cost you about Rs 1.5 lac.
Now you don’t have any rainy-day fund saved up and are no exploring your options. At present, you can either use your credit card to purchase the material for repair (which cost about Rs 1.3 lac) or you can take a personal loan. So what should you do?
First thing to note here is that your need is urgent. So you need to spend money quickly.
The best option is to first make the purchase using your credit card. Now the outstanding amount of Rs 1.3 lac has to be cleared off before interest-free period of credit card is over. Post that, the interest rate charged will be about 40%. And you don’t want to pay that.
So what you can do is that as soon as you make the purchase using credit card, you should hunt for a personal loan.
If this seems odd to you then bear with us for a moment.
A personal loan costs about 15-20%, which is much lower than credit card’s rate. So the urgency of cash requirement is dealt using the card. But to ensure that you don’t have to pay a very high interest on the card, you can take a personal loan to clear off the credit card dues. In return, you have a personal loan where you are paying much lower interest rate. This will save you several thousands in interest alone.
This is how you can make use of both options to deal with your situation in particular. But what if your requirement is not urgent? In such cases, its better to straightaway opt for a personal loan as they have lower interest rate. But that is assuming that your loan is approved. Credit cards are pre-approved about a certain limit. This should be kept in mind before deciding.