Credit Card vs No-Cost EMI vs Personal Loan vs Buy Now Pay Later

Want to make an online purchase but do not have money in your bank account? Fortunately, e-commerce websites allow you many options to buy on credit.

What Are Your Credit Options for Online Purchase?

  1. Shopping CartCredit card
  2. No-Cost EMI (on a credit card)
  3. Personal Loan
  4. Buy Now Pay Later scheme

I want to compare options that are directly available on e-commerce websites during checkout. There are many options to take credit beyond the options discussed above. For instance, you can take a personal loan from the bank and use it to purchase goods online. Or you can request your bank to convert your credit card outstanding into a personal loan. We won’t consider such options.

#1 Credit Card

Merit: Wide acceptability. All the websites accept credit cards. Depending on the timing of purchase, you can get up to 45-52days on interest free credit period. Reward points for purchases. The limit on purchase amount depends on your credit card limit.

Demerits: You must pay your bill in full before the due date. If you can’t, credit card is the most expensive debt in the formal finance sector, with the interest cost running up to 36-45% p.a. easily.

#2 No-Cost EMI

Merit: You get a longer rope. You have up to 6 months to make a payment. No additional cost.

Demerit: The facility is available only on select cards. Thus, you may not be able to avail the facility despite owning a credit card.

You won’t get a No-cost EMI for more than 6 months. Why? Because No-cost EMI is not a 0% interest rate loan. The upfront discount on the item gives you the impression of a No-cost EMI. Longer No-cost EMI tenure means a higher upfront discount, which may be unviable.

#3 Personal Loan

Merit: Available on almost all credit cards. You can choose a much longer tenure, up to 24-36 months. A longer loan EMI tenure means a smaller EMI.

Let us consider an example. You purchase an item for Rs 60,000.

  • If you use your credit card, you need to pay back in full over the next few weeks.
  • Under No-cost EMI, you pay Rs 10,000 per month for 6 months.
  • Under a personal loan at 15% p.a., you pay Rs 2,909 for 24 months or Rs 2,079 for 36 months. While you pay much more than the purchase amount (Rs 69,820 for 24-month EMI and Rs 74,877 for 36-month EMI), the small personal loan EMIs can be lighter on the pocket, increasing your affordability.

Demerit:  You pay a high rate of interest.

#4 Buy Now Pay Later Schemes

Such schemes are being pushed by many e-commerce platforms and wallets. We have written about Amazon Pay Later scheme. In this case, e-commerce platforms partner with banks/NBFCs to offer you quick loans for purchases.

Merit: You do not need a credit card/debit card for this facility. If you wish to avail the payment facility, there will be a quick credit check and you can use the limit after approval.

Demerit: This may not be interest-free. Depending on the platform, the credit facility may be interest-free if you pay within 15/30 days. Beyond that period, you will have to pay interest on your EMI or interest/penalty for delay in payments.

Which Is the Best Option?

Depends on your requirements and cash flows.

No-Cost EMI (on your credit card) is the best option for a big-ticket purchase since you get to borrow at no cost for up to 6 months. With this facility, you can spread out the expense over 6 months. Remember, no-cost EMI facility may not be available for your credit card.

If you can conveniently settle the bill by the next payment due date, a credit card is as good an option. However, if you can’t do that, avoid making a full payment using a credit card.

If you can’t make the full payment in a few weeks or months, it is better to take a personal loan (interest based EMIs). With a longer payment tenure, the resulting smaller EMIs will suit your budget better. From what I have seen, if you must, it is better to opt for a personal loan while making the purchase. Making a full payment on your credit card and then asking the bank to convert to EMIs will likely have a processing fee and an even higher rate of interest.

I do not see much merit in the Buy Now Pay Later facility, at least in the ones that I have seen. A credit card can easily provide the same benefit. Yes, you can use this facility even if you do not own a credit or debit card. However, we also need to see how many banks/NBFCs would be willing to lend to customers without a credit card.

Irrespective of the credit option you choose, you must repay what you borrow. With all these credit options, since you do not have to pay at the time of purchase, there can be a tendency to overspend. More so if you are buying on EMIs.

Leave a Reply