Swiping a credit card or avail a personal loan? What sounds better to you? While both the options seem to be tempting in case of a financial emergency, making a wise choice works best not just for your pocket but also your credit score. Both credit card loans and personal loans being unsecured in nature are easily available. Banks and lenders in India do a simple KYC check along with checking the income proof and offer you quick access to funds. But when it comes to deciding between the two, people often get confused and end up making the wrong financial choice. Here’s a quick read on the difference between credit card loan and a personal loan.
Difference between a credit card and personal loan
The major difference between a personal loan and a credit card is that a personal loan provides you quick access to money that you need to pay back each month to the lender in the form of an EMI. On the other hand, a credit card offers you a line of credit up to a specified limit that you can use on a revolving basis. In case of a good repayment record, you can also avail a loan on a credit card.
Personal loan is an unsecured loan that you can avail to cater to various financial needs ranging from medical purpose, home renovation, wedding, gadget purchase, debt consolidation, vehicle purchase and others. The interest charged on personal loans is high since it is an unsecured type of loan.
Credit card loan is given on the card i.e. up to a specified limit that comes pre-approved. The loan amount offered is blocked until you don’t fully repay the amount. Credit card loans are easily available and require no documentation at all. Availing this loan is not the same as cash withdrawal from an ATM.
Personal loan pros
- Typically, personal loans are offered at a low rate of interest than credit cards
Fixed monthly EMI amount that you have to pay
- Get quick access to large sum of money
Personal loan cons
- Interest rates are high for bad credit borrowers
- You are given lump sum amount of money, which you need to repay each month and which cannot be used again unlike other credit line
Credit card pros
- Interest-free purchase
- Get rewarded for each spend
- Easier to qualify with a good credit record
- Use it for any kind of purchase
Credit card cons
- Attracts high rate of interest if dues not paid on time
- Cards come with annual fees
Loan eligibility: Credit card loan can be availed instantly against the unused limit of the card. This type of loan does not require any documentation and is only available to customers having a good repayment record. With regular EMI payments, the blocked limit on the card is released. On the other hand, a personal loan is offered only after a strict KYC check and income proof check done by the banks. Borrowers credit score is checked on along with his professional details.
Disbursal and documentation: To avail a personal loan, the list of documents to be submitted by a salaried and self-employed professional are different. To avail a personal loan, you have to provide a set of documents including bank statement, salary slip, ITR, KYC documents. The loan disbursal takes upto 3-7 days depending on the lender you are availing the loan from. Personal loan should be availed for fulfilling financial requirements that are not time bound. A credit loan does not require you to submit any documents as you are already a card user and the bank already has access to your documentation and repayment record. The loan is disbursed instantly in your savings account.
Loan amount: The loan amount offered on credit card comes pre-approved only to a specified limit. For instance, if you have a credit limit of Rs. 1 lakh then the loan you can avail against it can be around Rs. 60,000- Rs. 70,000 depending on what the company offers. You can get a personal loan upto Rs. 30 lakhs depending on your credit eligibility and the lender you are applying with.
Interest rates: The interest levied on personal loan depends on the borrower’s credit history. Personal loan interest rates start from 9% and vary from lender to lender. Credit card loans are offered at a rate of 10%-30%.
Tenure: In case of personal loan, the tenure offered is 12 months- 60 months and credit card loan is usually offered for tenure of 6 months-36 months depending on the borrower’s eligibility.
Personal loans are an ideal option in case you require a large sum of money and credit card loans are a suitable pick in case of small amounts. As both these loans come with its set of advantages and disadvantages, one should pick either type of the loan depending on the purpose of the borrowing and repayment capacity.