Personal loan vs credit card loan: What should you go for?

Posted by mymoneymantra on December 31st, 2020

Credit card loans and personal loans have gone a long way whenever people need to opt for these two types of loans whenever they require finance. However, while obtaining a loan, some people remain in confusion - should they opt for a loan on their credit card or go for a personal loan? Which one is better between the two?

Choosing the type of loan completely depends on the borrower's requirement. As both these loan types has their own merits and demerits, one should select the loan that completely serves their borrowing purpose along with their repayment capability.

Personal loan, for example, is an unsecured form of financing which is primarily obtained for the costly purchases, wedding expenses, paying for child's education, medical emergency, debt consolidation and much more. There are no restrictions on what can be done with a personal loan that makes a good option to avail for many. Credit card loans, on the other side, emerge as a pre-approved loan and are provided upto the maximum limit of a credit card. However, it is not identical to an ATM cash withdrawals.

Industry experts claim that personal loans are suitable if a large amount is required. However, in smaller amounts of loan, the credit card loan option might be a favourable option. But always remember that your credit limit will be restricted temporarily to that level. Go through this article in detail to know about the major differences between personal loan and credit card loan while deciding for the one you wish to avail:

Differences between Credit Card loan and Personal Loan

1. Eligibility of loan

Credit card loans can easily be obtained against the unutilized credit limit on any credit card. No documentation is required for this loan. Although it is the speediest way of obtaining fund, not all borrowers are eligible for this loan. With frequent monthly payment, the restricted limit on the credit card is released.

In case on a personal loan, banks accept a personal loan application after doing an investigation on background check on the prospective borrower's financial capability. The background verification consists of the financial credibility, professional details and credit history details of the borrower. In this way, the banks identifies whether you will be capable of repaying the loan.

2. Documentation and Loan disbursal

A set of documents are required in case of personal loan which consists of your identity proof, bank statement of past 6 months, Income Tax Returns of the past 3 years, along with PAN, and address proof, in case you are salaried or self-employed. The loan disbursal is a longer process in the case of a personal loan as it needs documentation and has a due procedure. It is recommended to Apply for a Personal Loan when you have financial requirements and not during emergencies with a time restriction.

A credit card loan, on the other hand, does not need any documentation, since you are already a borrower with the credit card company. In the instance of a credit card loan, the loan disbursal amount could be instant, if the borrower maintains a savings account with the same bank, which is appropriate in case of an urgent requirement for an unsecured loan.

3. Loan amount

The loan amount you opt for depends on your need for cash. You can choose for a credit card loan if you require a small amount. The loan amount, however, will be based completely on your credit card limit. The rejection of your loan application possibly takes place if the loan requirement you have applied for exceeds your card limit.

The personal loan amount encompasses from a few thousand rupees to lakhs, which provides you maximum leverage. The amount is determined subject to the credit profile of the borrower and repayment viability. Moreover, you can choose for such loans during medical emergency.

4.  Interest Rate

While choosing for a loan is one of the most decisive points to remember. In the instance of personal loans, the sharp interest rates fall between 8.35% to 24%. The Peronal Loan Interest Rate, however, depends on the credit history of the borrower. If you have a sound credit history, with not much remaining loans, there are higher chance of obtaining a lower rate of interest.  However, the banks also provide personal loans on a reducing balance rates.

Credit card loans are provided at interest rates falling between 10% to 18%. It is suggested to bargain at a lower interest rate since they are already a borrower with the company subject to a healthy repayment track record.

5. Loan Tenure

The repayment durations are shorter for a credit card loan and range between 6 to 36 months. Hence, this provision should be mobilised for small purchases.

Personal loans, on the other side, have a repayment duration that falls between 1 to 5 years, which provides the borrower enough time to repay his obligation.