7 Differences between Credit Card Loans and Personal Loans
Personal loan and credit card loans, both are types of unsecured loans. But they are not the same. Credit cards are short-term debts, whereas personal loans are more suitable for individuals who need a longer repayment tenure to pay back the debt. So, in case you are planning to buy an item and are wondering whether you should take a loan on your credit card or personal loan, this blog should come in handy.
Read on to know and compare personal loans vs credit cards in detail.
Difference between Personal Loan and Credit Card Loan
Let’s differentiate credit card loans from personal loans based on certain parameters:
| Parameters | Credit Card Loan | Personal Loan |
| Borrowing limit | As per the pre-approved limit | To be decided by the bank depending upon the eligibility criteria of the applicant |
| Disbursement | Credited directly to the bank account of the cardholder | Sanctioned amount is transferred to the borrower’s bank account |
| Documents needed | No documents needed | Income, identity and address proof required. |
| Interest rate | Usually on the higher side | Usually on the lower side |
| Approval time | Within 24 hours | 3 to 5 business days (varies from lender to lender) |
| Borrowing type | Accepting pre-approved offer | Applying to a bank/ financial institution |
When to Get a Personal Loan?
You can avail a personal loan without collateral or security as it is an unsecured loan. Here are some situations when you should get a personal loan:
1. During Major Events
There may be situations where you do not have much time left to plan finances for some big life events. In such instances, taking a personal loan will prove to be beneficial owing to the lower rate of interest and flexible repayment tenure.
2. Consolidate Credit Card Debt
The interest rate of a personal loan is not very low but can be lower than that of a credit card. If you have multiple credit card debts, you can avail of a personal loan to pay those off. Thereafter, you will have one loan to pay off at a lower rate of interest. This will also improve your credit score.
3. Home Renovation
When remodeling your home, you might not have sufficient funds to cover the expenses. You can avail a personal loan to fulfill such requirements. This will also increase the resale value of your property.
Benefits of Taking a Personal Loan
Have a look at the following benefits of a personal loan:
- Simple eligibility criteria
- Offers both small and big ticket loans ranging from Rs.20,000 to Rs.40 lakh debt consolidation
- Flexible repayment options of up to 7 years
- Easy to access as most financial institutions offer personal loans
Drawbacks of a Personal Loan
Before you avail a personal loan, consider taking a look at these cons:
- Personal loans charge processing fees (some other fees might add up) which increases the total loan cost
- Some lenders may ask you to provide a host of documents
- Your credit score plays an important role in loan approval
- Missed EMI payments can call for heavy penalty fees
- Personal loans have higher interest rates than secured loans like home loans
When to Get a Credit Card Loan?
In case you have a credit card and are in need of urgent funds, you can check with your lender and get a loan against your credit card.
1. Cover Medical Bills
A day of hospitalisation could cost you thousands in medical bills. If you’re short on cash, you can take a loan on your credit card and clear the bills.
2. Finance Emergency Expenses
Whether you need to pay utility bills in lump sum or have some immediate expenses to meet, a credit card loan could help you to meet short-term emergency financial requirements.
3. When you Require Immediate Funds of a Smaller Amount
Let’s say you need Rs.15,000 urgently. Getting a credit card loan could come in handy in such a situation. The reason – loan amount is low which makes it easier to pay off within a short span of time without incurring high interest charges.
4. When You Don’t Qualify for a Personal Loan
In case you need urgent funds and your personal loan application is rejected, you can go for a loan against your credit card. However, you would need a credit card to apply for such loans.
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Benefits of a Credit Card Loan
Credit cards loans offer a handful of advantages:
- You can apply for a credit card loan on your credit card without any additional paperwork
- You do not need to be physically present at the bank to apply for a credit card loan
- With a good credit score, you can get an attractive interest rate on your loan
- Interests are only charged when you use available fund
Drawbacks of a Credit Card Loan
Along with the benefits, you should also be aware of the drawbacks a credit card loan brings:
- Interest rate is typically higher than personal loans
- You need to have a credit card to apply for a credit card loan
- Only eligible credit cardholders deemed fit by the card issuer can apply for a loan against credit card
Credit Card Loan vs Personal Loan: Which One is Better?
Credit cards and personal loans both have similarities in nature but can be differentiated on the basis of key factors. The following table will help you assess the ideal loan type for you:
| Credit Card | Personal Loan |
| Revolving line of credit | Non-revolving in nature |
| Variable monthly instalments | Fixed monthly payments |
| Higher interest rate | Lower interest rate |
| Used for smaller expenses generally such as shopping | Availed for large expenses such as financing wedding, education, etc |
| Can help build a good credit score | Can help to consolidate credit card debt |
| You need to have a credit card to apply | Anyone can apply for a personal loan |
Final Word
Personal loans could be helpful in case of last-hour emergencies, where the need for cash is immediate. For example, hospital expenses, immediate cash requirements for your business, etc. While a credit card loan is helpful to meet smaller expenses.
Compare the advantages and drawbacks of personal loans and credit card loans and apply as per your preference. Point to note: ensure to make your repayments on time to avoid hefty penalty fees.
FAQs
Ans: Yes, you can avail a loan against your credit card. With a credit card, there will be no need for documentation, unlike other loans.
Ans: Personal loans affect the credit score but it depends on how you repay the loan amount. As long as you pay the EMIs on time, your credit score will not be negatively impacted.
Ans: The key difference between a personal loan and a credit card is that the former is a lump sum amount approved at a comparatively lower rate of interest, which is repaid over a fixed tenure. Credit cards offer revolving credit as long as the account is maintained in good condition and the debts are paid in a timely manner.
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