Personal Loans and Credit Card Loans are quick and easy loan options nowadays. My friend had recently purchased a flat. After exhausting his home loan limit he was looking for an extra 3 Lakh to complete the interior of his home. The only option left in front of him was to opt for another loan. He approached the bank and described his problem. The bank manager gave him two options. (1) Personal Loan of 6 Lakh on flat interest (2) Credit card loan of 3 Lakh. He was confused and looking for an answer which one should he opt for credit card loan or a personal loan? If you are also in a similar situation here is an answer to your question.
Credit Card Loan or Personal Loan – It’s your choice
What is a Credit Card Loan?
A credit Card Loan is an unsecured loan offered in terms of cash advance, balance transfer, or purchase. This loan is offered to credit card holders. You need to pay back the loan amount in the future by the due date. In this option, you can borrow cash against your credit limit. You can typically access the funds via an ATM, a bank withdrawal, or even by writing a convenience check.
Pros of Credit Card Loans
- Instant Access: Get cash quickly without a lengthy approval process.
- Flexible Repayment: Minimum monthly payments can help you manage your cash flow.
- No Collateral Required: Unsecured, so you don’t risk losing assets.
Cons of Credit Card Loans
- High Interest Rates: Typically higher than personal loans, sometimes astronomical.
- Fees: Cash advance fees can be steep, often around 3-5% of the amount borrowed.
- Impact on Credit Score: High utilization can negatively affect your credit score.
What is Personal Loan?
A personal Loan is a loan given to an individual based on credit history, income, and repayment capacity. Repayment in the case of a personal loan is through fixed amount installment over a fixed term.
Pros of Personal Loans
- Lower Interest Rates: Generally more favorable than credit card loans.
- Predictable Payments: Fixed monthly payments make budgeting easier.
- Larger Loan Amounts: Often, you can borrow more money than with a credit card.
Cons of Personal Loans
- Approval Process: Can be lengthy, involving credit checks and documentation.
- Fixed Terms: Less flexibility in repayment schedules.
- Potential Fees: Origination fees, late fees, and prepayment penalties can add up.
How to select between a Credit Card Loan and a Personal Loan?
It is difficult to make a choice between credit card loans and personal loans as both of them sound similar. However, the following points will help you in making the correct decision.
- Application Process – The application process for both loans is different. Credit card loans are available easily. You just need to walk into your bank and opt for this loan. In the case of a Personal loan, you need to submit Form 16, a bank statement, income proof, and a KYC document for a loan application. Processing time in the case of personal loans is longer compared to credit card loans.
- Processing fee and pre-closure charges – Processing fees in both personal loans and credit card loan are the same. It is generally in the range of 0.5-1%. The pre-closure charges in both cases would be in the range of 2-5%. In a credit card loan you can lower the tenure of a loan by making a pre-payment. However, the personal loan comes with a fixed duration of 12-24 months.
- Loan Amount – A Personal loan is more suitable for a higher amount. If you are looking for a small amount credit card loan could be a suitable option. In this loan, you will get an amount up to your credit limit.
- Interest Rate – Interest rate plays a crucial role in the comparison. A personal loan is offered at the interest rate of 13-22%, however, credit card loans are offered at 12-15%. The rate of interest depends upon the bank. Personal loans are offered in two variants flat and reducing balance rate. In a flat rate, the interest amount is calculated flat on the entire principal. On the other hand, in reducing the balance rate interest amount will be calculated on reduced principal.
When to Choose a Credit Card Loan
Credit card loans might be your best bet in certain situations. Here are a few scenarios where they shine:
Emergency Situations
When you need cash ASAP and can’t wait for a loan approval process, credit card loans can be a lifesaver. Whether it’s a medical emergency or a sudden car repair, quick access to funds is crucial.
Short-Term Needs
If you need money for a short period and are confident you can pay it back quickly, the high interest might not be a deal-breaker. Think about using it to cover a gap until your next paycheck.
No Collateral Available
Since credit card loans are unsecured, you don’t have to worry about putting up collateral. This can be a big plus if you don’t have valuable assets to pledge.
When to Choose a Personal Loan
Personal loans can be the way to go in different circumstances. Here’s when they make sense:
Debt Consolidation
Got multiple high-interest debts? Consolidating them into a single personal loan with a lower interest rate can save you money and simplify your finances.
Large Purchases
Planning a home renovation or buying a new car? Personal loans often offer higher borrowing limits, making them suitable for significant expenses.
Predictable Repayment
If you prefer knowing exactly what your payments will be each month, the fixed repayment schedule of a personal loan is ideal. It helps with budgeting and avoids the risk of rising interest rates.
After making a comparison of both loan options my friend decided to opt for a credit card loan. As his requirement for a loan was less he was in a position to repay this money in less than 6 months.
Given a choice which loan you prefer Credit Card Loan or Personal Loan and why?
