Choose the right one according to your needs
Choose the right one according to your needs

Modern consumers, especially millennials and Gen Z, are looking for easy-to-use, easy-to-apply microloan solutions to help them better manage their recurring and occasional expenses. These factors have contributed to the widespread adoption of services such as Buy Now Pay Later (BNPL), credit cards and even personal loans.

Although these services have been part of the global digital lending ecosystem for decades now, the pandemic has been a spur to their huge popularity in conjunction with the rise of e-commerce, increased internet usage mobile and the growing redundancy of cash transactions. Through this article, we dig a little deeper into the difference between the three services – BNPL, personal loans, and credit cards – as well as which financing option to choose and why. Read on to find out more.

BNPL against credit cards

Credit cards outperform BNPL in terms of overall acceptance as the latter is currently limited to partner merchants, despite the fact that service providers are constantly adding several new partners. Through their transactions, credit cards also provide rewards and privileges, allowing users to save more and easily access other lifestyle needs. Higher spending limits may be available for credit cards, but may be more difficult to obtain due to strict underwriting standards. Unlike credit cards, BNPL services do not charge annual, processing and renewal fees. The main differentiator, however, is the absence of interest charges on BNPL services – unlike credit cards where customers have to pay a non-cumulative charge for late payments, although a few credit cards now offer EMIs at zero rate.

BNPL vs personal loans

Personal loans are versatile unsecured, big or small, financing options with significantly higher credit limits than BNPL’s services. Unlike the BNPL, higher fees apply on personal loans. Another important distinction is revolving credit, which BNPL provides, as opposed to one-time personal loans. Additionally, lenders look at a client’s age, income, credit score, occupation, and other factors to determine loan eligibility, while the application process and loan disbursement for pre-approved loans are fast. BNPL, on the other hand, often uses state-of-the-art processes to assess a borrower’s creditworthiness in minutes. However, the choice ultimately depends on one’s needs, eligibility, and ability to repay.

Credit cards vs personal loans

Both personal loans and credit cards are ways to borrow money. They share many of the same credit terms. Loan and credit card agreements often include cash offered by a lender at a pre-determined interest rate, monthly payments including principal and interest, late payment penalties, underwriting requirements, amount limits and other conditions. Abusive use of either type of credit can hurt one’s credit rating, making it difficult to secure future loans, find suitable housing, or even find a job. However, beyond the similar attributes that personal loans and credit cards share, there are important distinctions between them, such as repayment terms and long-term balance. Personal loans, unlike credit cards, do not provide ongoing access to funds. A borrower receives an initial lump sum payment and has a set period of time to repay the loan in full through scheduled payments and repay it. And for borrowers with good to high credit ratings, this arrangement usually comes with a lower interest rate.

In a word

Credit cards may offer a wider range of benefits such as a higher credit limit and worldwide acceptance, but late payments may incur compound interest. As for BNPL services, these are smaller and simpler credit facilities for consumer purchases from partner merchants. They often result in EMIs with no interest charges and only one-time charges. Compared to non-pre-approved credit cards, it can be easier to sign up for. These characteristics make them ideal for consumers seeking short-term microloan, especially those who are not credit card qualified. Personal loans are favored for purchases of variable size, especially in times of emergency or financial shortage.

Different types of loans, whether BNP, credit cards or personal loans, should all be used with extreme caution. Users should avoid borrowing too much and relying on them to finance their lifestyle and purchases. They need to read the fine print carefully, understand the fees and make sure their dues are paid on time.

Late payments on credit cards and personal loans generate interest and, in the case of BNPL, a penalty is imposed. Careless use and late payment of any of these facilities can hurt a user’s credit rating, making it harder for them to get the best deals on future loans.



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The opinions expressed above are those of the author.



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