Personal loan or Credit card loan: Which one should you opt for and when?

Need a loan immediately? Find out if you should opt for a personal loan or take one against your credit card.

Personal loan or Credit card loan: Which one should you opt for and when?

Assume you’re in need of some urgent cash. Should you opt for a personal loan or take a loan on your credit card? How do you decide which of the two to go with?

Actually, it would depend entirely on your requirement. Both types have their advantages and disadvantages, and you need to pick one judiciously only after fully understanding the purpose of borrowing and your repayment capability.

Let’s look at the two options in greater detail.

Related: Types of personal loans you must know about

Personal loan – A personal loan is an unsecured loan that you can take for any reason, such as a medical emergency, an expensive purchase, or even to sponsor a vacation. Some people also opt for a personal loan to clear a pending debt. There are no restrictions on what you can do with a personal loan, which makes it attractive for many.

Credit card loan – A credit card loan, on the other hand, is a pre-approved loan that is offered as a part of your credit card limit that has been lying unutilised. Remember, it is not the same as cash withdrawal at an ATM.

1. Eligibility

Personal loan – A bank will conduct a thorough background check on your financial capability before approving your personal loan application. The check will include your professional details, your financial credibility, and even your credit history. The bank needs to make sure that you will be in a position to repay the loan.

Credit card loan – As mentioned earlier, a credit card loan can be easily availed of against the unused credit limit on your credit card, that too without any documentation. While this is the fastest way to obtain unsecured funds, not all customers will be eligible for such a loan. Think carefully before you turn to this option – if approved, your credit card limit will be temporarily blocked. The limit is released as the outstanding amount decreases with regular monthly payment.

Related: When is it a good idea to take a top up home loan?

2. Interest rate

This is perhaps the most important point to keep in mind while taking a loan.

Personal loan – A personal loan comes with steep interest rates, anywhere from 13%-22%, depending on your credit history. If you don’t have many outstanding loan obligations, you could qualify for a lower interest rate. Some banks also offer personal loans on a reducing balance rate.

Credit card loan – A credit card loan is offered at interest rates ranging between 10% and 18%. Since you are already a customer with the credit card company, you could negotiate a lower rate, provided you have a good repayment track record. Do check with your bank.

3. Loan amount

Which loan you opt for also depends on your cash requirement.

Personal loan – A personal loan gives you greater leverage, and you can get a loan for as low as a few thousand rupees up to a couple of lakhs. Once again, the amount is decided by several factors, such as your repayment capability and credit profile. A medical emergency, such as an unplanned surgery, can be taken care of with a personal loan where you receive the requisite amount of cash after a credit check and eligibility.

Credit card loan – This is an ideal option if you need only a small amount. The loan amount will depend entirely upon your credit card limit. If your loan requirement is more than your card limit, your loan application is likely to get rejected.

Related: Know your EMI's in-and-out. Are you paying more than you should?

4. Tenure

Personal loan – The repayment tenure of a personal loan can range anywhere from 1 to 5 years, giving you sufficient time to plan and repay the debt.

Credit card loan – Credit card loans, on the other hand, have shorter loan tenures, ranging from 6 months to 36 months, which is why it makes sense to use this for small purchases.

Related: Taking a loan against your credit card? Here are some things you must know

5. Documentation

Personal loan – Whether you are salaried or self-employed, you have a set of documents, such as your PAN, identity and address proof, bank statement of six months and ITR of the last 3 years.

Credit card loan – In comparison, a credit card loan does not require any documentation. All you need is a good repayment record. 

6. Loan disbursal

Personal loan – Since your personal loan requires documentation and has a due process, it might take longer to get a personal loan. It is prudent to apply for a personal loan for financial requirements that are not emergencies.

Credit card loan – If you have a savings account with the same bank the loan amount disbursal could be immediate. This option is more reliable if you have an urgent need for an unsecured loan.

So, what’s the verdict?

A personal loan is a good idea if you need a large sum of money to pay for a medical emergency, or if you want to pay off another larger, long-pending loan. But if you want a smaller amount, say to pay for a gadget, and you don’t mind your credit limit being blocked temporarily, a credit card loan might work better for you.

Irrespective of what loan option you go for, compare the interest rates and the repayment conditions as these could vary from lender to lender.

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