Despite budgeting and financial planning, sometimes unexpected expenses can leave you overwhelmed. In such scenarios, applying for credit is the only way to ease the load. The good news is the availability of multiple credit options with distinct benefits. The most common ones include a personal loan, a credit card, and an overdraft facility. Which one of them fits your needs and makes sense, in terms of affordability? Learn in this comparative blog.

Understanding the meaning of different credit options
Before comparing them based on affordability, let’s understand what they mean to set your expectations right.

Personal Loans:
A personal loan is a straightforward financing option for various financial needs. It is a way of receiving a lump sum amount upfront and repaying it along with the interest in fixed EMIs, spread across a predetermined tenure. You can expect various benefits from lenders like IDFC FIRST Bank with their FIRSTmoney personal loan offering:

• 100% digital application process








• Zero foreclosure charges








• Instant disbursal within 10 minutes








• Flexibility to avail multiple on-demand loans








• Low processing fee starting at 0%

Credit Cards:
A credit card is a revolving credit. You are assigned a credit limit to spend, and you repay the amount during the monthly billing cycles. Paying the full bill by the due date saves you from the interest. But carrying a balance forward means incurring steep interest rates. This is because the interest is charged on the unpaid amount every day until it’s cleared. So a credit card is convenient as long as you are disciplined and mindful of its usage.

Overdraft:
An overdraft facility is offered against your bank account as a short-term line of credit. This way, you can withdraw funds beyond your available balance up to a specified limit. There is no fixed repayment schedule, and you can repay the amount used based on your cash flow.

How the cost actually works: Interest and other charges
The cost of availing of each credit option discussed above comes down to interest and other applicable charges that add up over time. Let’s understand how that works:

Personal loan
The cost of a personal loan is easier to anticipate. The main charge for borrowing is the interest, which is decided based on your eligibility. The loan provider checks your age, income stability, credit score, and existing obligations to determine the final rate. The other charges include processing fees, EMI bounce charges, late payment fees, etc.

Credit cards
Credit cards also come with an interest charge, which can be relatively high when you carry the balance forward. If you clear the payment before the due date, you incur zero interest charge. But when the balance remains, you are charged interest daily on the unpaid amount. This is coupled with late payment fees, cash advance fees, GST, over-limit charges, and card replacement fees.

Overdraft
With an overdraft facility, you incur interest only on the amount you use instead of the total limit and the number of days it continues to remain outstanding. You also incur processing fees, annual renewal fee (in some cases) and penalties if the overdue amount exceeds the sanctioned limit.

Which credit option is cheaper for large expenses?
The key point to focus on is the interest, as it is a major cost of borrowing. Here’s a comparative analysis of how it works for different credit options so you can make an informed choice:
A personal loan keeps the cost under control as you pay the interest over a fixed tenure. The interest doesn’t compound aggressively over time. You can use a personal loan calculator to understand this relation between the EMIs and interest.

Credit cards can become costlier with large expenses because the unpaid balance attracts daily interest aggressively. When the outstanding amount is high, even a short delay in repayment can lead to steep interest costs.

The overdraft facility can be economical as the interest applies only to the amount used. However, for large expenses where you cannot repay quickly, the interest can accumulate for unpaid amount over time.

Final words
Large expenses can seem overwhelming and derail your finances. But borrowing can ease your financial load when managed thoughtfully. The key to understanding the cost of credit options is to learn about the interest. Loan options like FIRSTmoney Personal Loan by IDFC FIRST Bank make this easier with a personal loan calculator. With FIRSTmoney you can avail funds at low interest rate starting at just 9.99% p.a. and choose a flexible repayment tenure from 9 to 60 months.