There could be times when you need some credit or cash but you don’t have enough funds to meet your financial needs. At that time, a loan on a credit card and personal loans proved to be the most viable financial options. These are the commonly considered choices for getting quick access to funds. To choose between these options, you need to make decisions based on your financial requirements and circumstances.
What is a Credit Card Loan?
Loan on credit cards does not require any documentation because it is a pre-approved loan. It is commonly used for daily expenses, providing ease of transaction. Credit cards allow making purchases and paying bills later on a particular payment due date. It is the fastest option to get unsecured credit. Moreover, it is known as a revolving credit because you can spend your money, clear your debt, and repeat the cycle unless you remain within your card limit.
You can select the amount you want to repay, ensuring it aligns with the minimum payment requirement. When you choose to pay just the minimum amount, the outstanding amount will automatically convert into debt which consists of interest rates and late fees. Don’t consider this loan similar to cash withdrawal because it is a particular part (unused) of a limit on your credit cards.
What Exactly is a Personal Loan?
Personal loans are also unsecured and can be borrowed for several purposes such as debt consolidation, medical emergencies, purchasing appliances, etc. with higher interest rates. Since they are not revolving, they end after repaying the entire loan amount. They come with flexible repayment terms that range from 12-60 months. They are a better option for you if you want more time to settle your debt because they provide extended repayment periods.
A direct deposit into your account needs to be repaid with a specific interest rate over a fixed period. The biggest advantage of getting a personal loan in India is an expectable and consistent monthly repayment amount, which helps with effective budgeting and financial planning. Furthermore, they are easier to access because they come with rigorous minimum deposit requirements for opening an account.
Major Differences Between A Credit Card and Personal Loan
1. Unsecured loan
Credit cards and personal loans both are unsecured and don’t need any collateral. However, when you apply for a personal loan, you need to prove your financial ability to repay the loan amount.
2. Monthly payments
For a loan on credit cards, monthly payments depend on the amount invested in one billing cycle. However, for personal loans, monthly payments are based on the loan tenure selected for paying EMIs.
3. Approval time
Personal loans are processed more quickly than other forms of credit but document verification and completing the application process may take some days. Since a person having credit cards already has their KYC details updated on the portal, they can get a loan approved and disbursed almost immediately by the issuer.
4. Documentation
A loan on credit cards doesn’t require any documentation because it is a pre-approved loan while a personal loan needs various documents for approval. For example, it may need KYC documents as proof of residence and identity, financial proof, etc.
5. Interest rates
The interest rate on a loan on credit cards usually ranges from 12-22% and depends on the card you select from a specific bank. However, you can get this loan at flat interest rates. The monthly interest rate on a flat-rate loan is applied to the starting loan amount and remains the same for the whole period of tenure. Personal loans come with 10-26% interest rates and provide chances to reduce the interest via balance reduction options. The interest outflow decreases in the case of a reduced balance loan.
6. Loan amount
The loan amount on credit cards is decided based on the income, total limit of the card, unutilized portion of a card’s limit, and other essential factors. Usually, the amount ranges between 50K to 2.5 lakh. Personal loans have longer durations that range from as little as 50K to 25 lakhs based on your eligibility and financial requirements.
7. Repayment terms
Since a loan on a credit cards is given for a smaller amount, they have shorter repayment duration. Personal loans, on the contrary, provide the flexibility to select a longer repayment timeline of 5 or more years.
Credit Card Loan or Personal Loan: Which is Best for My Financial Requirements?
As you read above, credit cards and personal loans both have their own advantages and purposes. So, there is no one specific winner when comparing these loan options. Credit cards offer the convenience of regularly using the card for expenses and paying the bill every month later. Additionally, the interest rate is enough for daily expenses, and provides exciting opportunities to earn excellent rewards on every purchase.
A personal loan, on the other hand, offers the flexibility to get a loan for a larger amount with a longer tenure of up to five years. However, it is recommended to check your eligibility when making bigger purchases. Personal and credit card loans are unsecured. Compared to credit cards, they have slightly higher rates of interest, however, extended repayment duration makes monthly installments easier.
Conclusion
At the bottom line, go for a loan on credit cards if you need a small amount of loan while choose personal loans if you want a huge loan for bigger expenses. If you are still in doubt about which loan option to choose to meet your financial needs, contact the financial advisor of your bank for personalized recommendations. They will guide you in selecting the right option based on your financial emergencies and other crucial factors.
Thank you for the insightful comparison between personal loans and credit cards! The detailed analysis really helps in understanding the pros and cons of both options. I appreciate how you highlighted the key factors like interest rates, repayment flexibility, and credit score impact.