Want cash? Unsecured loans or credit cards? Beware! Never pick this option

There are various mechanisms available to fulfill your need for cash. When in need of financial assistance, banks are the best platform and they have a variety of ways to help you. It would not be wrong to say that loans come as the best method to fulfill your financial needs. Among loans, unsecured loans which are commonly known as personal loans are a popular credit product in the market that are available to salaried and self-employed individuals. However, unsecured loans face competition from credit cards, which are equally popular. But the question for a borrower is, which of these products is better?

 Aditya Kumar, Founder & CEO Qbera.com explains, if you are thinking which of these products to opt for and which of these has the upper hand over the other, many financial experts are of the opinion that unsecured loans are a better option than credit cards for a lot of reasons. 

He further adds, "While this is true to a large extent, to put it in a nutshell, it boils down to what your preferences are, your ways of spending, and how you prioritize your expenses. If we are to look at the general picture - citing prominent features of each of these two products - unsecured loans have the edge."

Here's how you can decide on which is better option, unsecured loans or credit cards in times of financial needs, as per Qbera.com. 

Lower Interest rates

This point is quite straightforward actually – interest rates on unsecured loans are far lower than prevalent rates on credit cards. If you look at the APR or Annual Percentage Rate of Interest, credit cards attract staggering rates that fall in the range between 35% and 40% p.a. (perhaps more in the case of some cards). 
Comparatively, personal loan interest rates start from 10.99% p.a. and can go up to 24% p.a. Most individuals end up being offered rates in the 11%-18% p.a. range.

Flexible repayment tenures

When you apply for a personal loan, you can choose a tenure of your choice – available tenures fall in the range between 6 months and 60 months, with some lenders offering unsecured loans with 3-month tenures as well. 

As for credit cards, you’ll have to pay the minimum monthly payment which is usually about 3% of your total outstanding balance (it can be more too – this depends on how long you’ve had your outstanding balance for). 

It needs to be noted that even credit card outstanding amounts can be converted to flexible monthly repayments across a set tenure, but interest rates are much higher.

Wider range of loan amounts

In the case of credit cards, the maximum credit limit that a bank will offer you is about 2x times your monthly income. As for personal loans though, you can get up to 6x times your monthly income, or even more if your credit health is impressive. 

Moreover, lenders these days allow individuals to apply for top-up loans after they’ve completed a certain period on their loan tenure. Usually, lenders offer top-ups to individuals who’ve completed at least 1 year of their loan tenure.

Nominal pre-closure charges

A big advantage of taking a personal loan is that you can opt for a longer tenure to keep your monthly repayment amounts smaller, and pre-close your loan at a nominal charge. 

Pre-closure charges are usually about 2%-5% of your outstanding principal, along with a certain interest charge. Loan pre-closure charges usually vary from lender to lender, but they aren’t too high to be deemed extortionate.

While these points portray credit cards in a shade of grey, credit cards come with a massive advantage – the interest-free period. All banks offer interest-free periods on their credit cards – meaning, if you manage to clear the entire outstanding balance on your card before the interest-free period every month, you aren’t charged interest!

Lastly the kind of assistance is suitable for you solely depends upon your spending habits, repayment fashions and how you prioritize your expenses.