Credit cards, personal loans, BNPL: Features, costs, eligibility explained

Financial products must be used in a disciplined way as they weigh on credit score and loan eligibility

Credit cards, personal loans and buy now pay later (BNPL) are some options people use when they need cash urgently. These financial tools work differently in terms of costs involved and repayment rules. In this article, we explain more about credit cards and short-term loans to make borrowing easy.  

Credit cards vs short-term credit and BNPL

Credit cards are issued by banks and financial institutions that people can use to borrow money and pay the debt later to the lender by the specified due date. It is a flexible borrowing arrangement called revolving credit where the cardholder can continuously access the credit up to the credit limit. Once the debt is repaid, the credit is available again. 

 

 

On the other hand, short-term credit is a personal loan available to borrowers. Typically, these are unsecured loans and must be repaid within a few days or up to 12 or 24 months. Unlike credit cards, short-term loans allow one-time borrowing and one has to apply for another loan if this amount is used up. 

 

BNPL is a facility offered by banks, ecommerce platforms and shops to customers to purchase products or services without paying the full amount immediately. The lending institution makes the payment to the vendor and the borrower can repay the amount through equated monthly instalments (EMIs). 

 

Interest rates

Credit card borrowings do not attract any interest rates if the repayment is made within the grace period, which ranges from 30-45 days to 60 days. However, if the dues are carried over month on month, the interest rates could be up to 30-40 per cent.

 

On the other hand, personal loans attract annual interest rates starting at 10 per cent and ranging up to 24 per cent. Depending on factors like age, income, credit score, the interest rates could be lower for a borrower.

Tenure and billing rules

Cards are based on revolving credit. That is, the process of repayment and borrowing is ongoing, while remaining within the credit limit. Repayment is flexible as the borrower can either pay the complete borrowed amount or convert it into equated monthly installments (EMIs). 

 

The billing cycle varies from lender to lender, ranging 27 to 31 days. The borrower must repay the entire borrowed amount by the due date or at least the minimum due amount. In case, one fails to do so, the lender levies penalty charges. 

 

On the other hand, personal loans are repaid through EMIs. This amount is decided by the lender and the full EMI amount must be paid to avoid penalties. 

Eligibility

The eligibility criteria for credit cards and short-term loans are somewhat similar. Lenders consider factors such as the applicant’s age, income, employment and credit score before issuing a credit card or sanctioning a loan. Typically, it is easier for existing customers of a bank to avail of credit cards and loans. 

 

Credit cards vs short-term credit vs BNPL

Credit cards and short-term loans may seem to serve the same purpose, of fulfilling short-term fund requirements. However, they differ in many ways. Credit cards may be beneficial for everyday purchases and short-term borrowing where the repayment must be made quickly to avoid interest charges. 

 

Till the time the credit limit is not exceeded, the cardholder can continue to make purchases and repay as per their convenience. Besides, there are rewards points and other benefits that come with credit cards. There are some disadvantages to note when using credit cards. These include the hidden charges, high interest rates and long-term debt trap by paying only the minimum due.

 

On the other hand, personal short-term loans are a better choice if one is looking to make a substantial and one-time purchase. The repayment can be easily made through EMis, which puts less burden on one’s pocket. For example, short-term loans work best for repaying a debt or a wedding celebration. Similarly, BNPL is an option available to people when they are clear about purchase needs and repayments.

How to protect your credit profile

Here are some tips for borrowers to maintain their credit profile:

• Understand the repayment rules and due dates to avoid penalties. 
• Pay credit card bills and short-term loan EMIs on time. 
• Avoid credit card dues to carry forward by paying only the minimum due. 
• Do not apply for credit cards and loans frequently, which can affect credit score.  

FAQs

What is the cost involved in credit card payments and short-term loans?

Both short-term loans and credit cards involved hidden charges. Besides the interest fees, credit cards have additional charges such as membership fee, EMI conversion fee, late payment fee, etc. In short-term loans, the charges involved include interest fees, loan processing fees and late payment fees.

How does borrowing shape credit score or eligibility?

Frequently taking loans can have an impact on credit score. To minimise this impact, one should remain disciplined with repayments and maintain a clear payment record. Otherwise, it can reduce the chances of qualifying for loans in future.

When does prepayment, consolidation or a balance transfer make sense?

Prepayment makes sense when one has additional funds and they want to pay off the entire borrowed amount to avoid interest charges. Balance transfer is an option to avoid high interest rates by moving the credit card dues to another card or lender. Debt consolidation works when one has too many debts to pay. So, they can apply for one comprehensive loan to pay off the debts. 

Which habits create debt traps or avoidable long-term stress?

Certain habits can lead to debt traps. These include paying only the minimum due for credit card bills. It can increase the outstanding dues and attract high interest charges. Relying on credit for everyday purchases can also lead to debt traps and financial stress.