Personal Loan vs Credit Card Loan: Which is the right choice for you?

Personal Loan vs Credit Card Loan: Which is the right choice for you?

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Irrespective of what loan option you choose, compare their specification before opting for one.

Credit card loans, along with personal loans, have become a way of life today as a large number of people prefer to go for these two types of loans whenever they need funds for something. However, while taking a loan, some people remain in a dilemma– should they go for a loan on their credit card or opt for a personal loan? Which of the two would be better for them?

Industry experts say choosing the type of loan totally depends on the requirement of the borrower. As both these types of loans come with their own set of advantages and disadvantages, one should pick one only after fully understanding one’s purpose of borrowing along with one’s repayment capability.

Personal loan, for instance, is an unsecured loan which is typically taken for an expensive purchase, medical emergency, a vacation, clearing pending debt, or even marriage. There are no restrictions on what you can do with a personal loan, which makes it attractive for many. Credit card loans, on the other hand, come as a pre-approved loan and are given up to the maximum limit of a credit card. However, it is not the same as cash withdrawals at an ATM.

Experts say personal loans are ideal if a large sum of money is needed. However, in case of smaller amounts, the credit card loan option might be better. But note that your credit limit will be blocked temporarily to that extent.

Irrespective of what loan option you choose, compare their specification before opting for one.

1. Eligibility of loan: Credit card loans can easily be availed against the unused credit limit on any credit card. No further documentation is needed for this loan. Though this is the fastest way to get fund, not all customers get eligible for this loan. With regular monthly payment, the blocked limit on the credit card is released.

In the case on a personal loan, banks approve a personal loan application only after conducting a thorough background check on the potential borrower’s financial capability. The background check includes the borrower’s financial credibility, professional details, along with credit history details. This way the bank finds out whether you will be in a position to repay the loan.

2. Documentation and Disbursal: In case of personal loan, you have to provide a set of documents, such as your identity proof, bank statement of last 6 months, ITR of the last 3 years, along with PAN, and address proof, whether you are salaried or self-employed. The loan disbursal takes longer in the case of a personal loan as it requires documentation and has a due process. Experts say one should apply for a personal loan for financial requirements and not during emergencies with a time constraint.

A credit card loan, in comparison, does not require any documentation, since you are already a customer with the credit card company. In case of a credit card loan, the loan amount disbursal could be immediate, if the borrower holds a savings account with the same bank, which is convenient in case of an urgent need for an unsecured loan.

3. Loan amount: The loan amount you choose depends on your cash requirement for the financial need. You can opt for a credit card loan if you need a small amount. The loan amount, however, will depend entirely upon your credit card limit. Your loan application is likely to get rejected if the loan requirement you have applied for is more than your card limit.

The loan amount of a personal loan ranges from a few thousand rupees to a couple of lakhs, which gives you greater leverage. The amount, however, is decided by the borrower’s credit profile and repayment capability. In case of a medical emergency, you can opt for such loans.

4. Interest rate: While opting for a loan this is one of the most important points to keep in mind. In the case of personal loans, the interest rates are steep ranging between 13 and 22 percent. The rate of interest, however, depends on the borrower’s credit history. If you have a good credit history, with not many outstanding loans, there are chances you could get a lower interest rate. Reducing balance rates on personal loans are also offered by some banks.

Credit card loans are offered at interest rates ranging between 10 per cent and 18 per cent. Experts suggest borrowers can also negotiate a lower interest rate since they are already a customer with the company, given they have a good repayment track record.

5. Tenure: In case of a credit card loan, the repayment periods are shorter and range from 6 to 36 months. Hence, this option should be used for small purchases.

Personal loans, on the other hand, have a repayment period that ranges from anywhere between 1 and 5 years, which gives the borrower sufficient time to repay his debt.