Most people prefer buying a two-wheeler on finance. But if you are thinking about swiping your credit card to make this purchase, then it is a grave financial mistake that one can make. Though there might be many luring offers made by your credit card company, but using your credit card is always a costly deal in more ways than one.
Read on to know the financial pitfalls of using a credit card to purchase a two-wheeler. There are a diverse variety of two-wheelers in the market, ranging from entry-level commuting vehicles to superbikes. Similarly, financing options for the bike are also numerous. But it is very important to choose the right financing option while buying a two-wheeler.
Why you should not use a credit card to buy a two-wheeler?
Many youngsters swipe their credit cards to make high-end purchases because of the ease of use. But this is a grave financial mistake that can lend them in a debt trap. Read on to discover the demerits of using a credit card for two-wheeler purchase.
Reduced repayment tenure
Buying a two-wheeler is an expensive endeavour. Even if you finance your two-wheeler and the lender does not give you enough time to repay, the likelihood of default increases. The most significant disadvantage of credit cards is the length of repayment.
The lender requires you to pay the utilised amount within 25 to 55 days per the credit card terms and conditions. If you exceed this time limit and only pay the minimum due amount then the credit card company will levy very high interest rate on your credit amount. This makes repayment even more difficult. However, you can choose a tenure ranging from 6-48 months when applying for a bike loan.
Although a credit card can help you buy anything whose cost is within your card limit, there is a significant disadvantage to it. According to the credit bureau, your credit score will suffer if you use more than 30% of your total credit limit. That is because the credit bureau will perceive you as a hungry borrower.
Suppose you own a credit card with a limit of Rs 2,50,000. The bike you wish to buy costs worth Rs 1,00,000. Here, if you want to use your credit card, you will be exhausting 40% of your limit. On the other hand, with a two-wheeler loan, you can easily purchase your dream bike without worrying about your credit score.
Rate of Interest
Credit cards are popular because they have no interest rate. But there is a big catch. Credit cards do not levy interest rate on the borrowed amount only if you pay back within 30 days. But if you fail to make the repayment within this time, then the interest rate levied on the amount is very high. In addition to that, the lender will charge you a huge penalty if you miss the due date.
However, when it comes to bike loans, the interest rate is comparably much lower. Bike loans are a type of secured financing in which the lender hypothecates your vehicle to protect themselves in the event of a default. Given this, the interest rates will be significantly lower. You can also choose the due date as per your convenience.
A credit card has a lower limit. If you are just starting your career and have a low salary, the lender may grant you a card with a meagre Rs 50,000 limit. In this case, a credit card may not be an option if you want to buy a sports bike or even an entry-level commuter bike.
However, if you apply for a bike loan, the lender will offer you a loan-to-value (LTV) of up to 95%. A loan offers more flexibility in terms of loan amount. You can avail a higher loan amount by offering collateral or adding a co-applicant in your loan application.
Accessibility
Credit cards are an unsecured form of financing. Given this, lenders are hesitant to issue this product to every applicant. They investigate your monthly income, work experience, previous credit behaviour, and the employer's credibility.
On the other hand, a two-wheeler loan does not require high earnings. A job with a multinational or a government organisation is also not required. A minimum annual income of Rs 1,80,000 will be sufficient to get approval.
Hidden Charges
Credit cards have a lot of fees and charges that you may not know of. This often goes missing as you skip reading the terms and conditions. The annual maintenance fee is the most well-known charge associated with the card. However, there could be several hidden charges depending on the card issuer. In order to avoid financial constraints, it is critical to read the fine print provided with the welcome kit.
Credit Card vs Bike Loan: Key Differences
Parameters
Two-Wheeler Loan
Credit Card
Loan amount
Up to 95% of the bike's value
Rs 50,000 to Rs 3,00,000 in most cases
Repayment tenure
6-48 months
25-55 days
Key considerations
The lender emphasises the resale value of your bike as well as your credit report.
The lender considers your monthly income, credit score, and employer's reputation.
Interest rate
They offer funds at a lower interest rate due to the hypothecation of the financed vehicle.
Typically, there is no interest, but late payment incurs a significant interest penalty.
Eligibility Criteria
Simple qualifying conditions
Stringent eligibility criteria
Sustainability
You can use them only for the purchase of a two-wheeler, irrespective of the brand and model.
You can use them to buy groceries, a smartphone, pay utility bills, or for any other small purchases.
What should you know before taking a two-wheeler loan?
If you intend to finance a used bike, make sure it is not a discontinued model and that its paperwork is complete.
Although the maximum funding is restricted to 95% LTV, the final disbursement is determined by your debt-to-income ratio, credit history, and income consistency.
It is always good to opt for a lower loan amount. Try to make a higher down payment for your bike. This will reduce your EMI burden.
The funding value includes the cost of third-party liability insurance.
The funding value does not take into account any additional accessories you may install on your vehicle. You must pay for them yourself.
Credit cards should only be used for small ticket purchases and the card bill should be repaid in full within the billing cycle. Opting for a credit card EMI is a bad financial decision. It not only increases your interest burden but also affects your credit score. That’s why, you should never make high-end purchases with a credit card. You can opt for a personal loan or a customized two-wheeler loan to make such purchases.
Katyaini is a finance expert with a focus on the non-banking financial sector, bringing over 8 years of experience in NBFC. She specializes in simplifying complex financial concepts for readers, helping them navigate the NBFC landscape. Outside of work, she is passionate about travelling.
