Two popular solutions for quick funding are Credit Card Loans and Personal Loans. Although they fall under the category of unsecured loans. One can say that the two have unique characteristics that fit different financial needs. In this guide, we will compare the two, their respective pros and cons, and ultimately assist you in deciding which one fits your needs.
Understanding Personal Loan
Personal loans are unsecured loans taken for anything, because this is a multipurpose loan. Some of these may include medical expenses, big purchases, weekend getaways, or repayment of other debts. Interest rates usually tend to be higher on unsecured loans as compared to secured ones since these loans do not require collateral.
Personal Loan: Key Features
- Purpose: Can be used for any personal or financial need
- Interest Rate: Between 13% and 22% per year
- Loan Term: Long-term repayment options from 1 to 5 years.
- Approval Time: Can take a few days due to required documentation.
- Loan Amount: Higher loan amount eligibility compared to credit card loans.
- Repayment Method: Fixed EMIs on reducing balance interest rate
- Collateral: No collateral required
Example:
Rohan takes a personal loan of ₹5 lakh at an interest rate of 14% for 3 years. His EMI would be ₹17,093 per month.
Understanding Credit Card Loan
A Credit Card Loan is a pre-approved loan using your unused credit limit, allowing quick fund access without extra documentation, with repayments in EMIs.
Key Features of a Credit Card Loan:
- Purpose: Can be used for any financial need
- Interest Rate: Typically 10% – 18% per annum (lower than personal loans)
- Loan Tenure: Shorter repayment periods ranging from 6 months to 3 years
- Approval Time: Instant approval with minimal or no documentation
- Loan Amount: Limited by your credit card’s available limit
- Repayment Method: Fixed EMIs, usually on a flat interest rate
- Collateral: No collateral required
Example:
Priya has a credit card with a limit of ₹3 lakh. She takes a ₹1 lakh loan at 12% flat interest for 2 years. Her monthly EMI would be ₹4,700.
Comparing Personal Loan and Credit Card Loan
| Feature | Personal Loan | Credit Card Loan |
| Approval Time | Takes a few days | Instant approval |
| Documentation | Requires income proof & documents | No documentation required |
| Interest Rate | 13% – 22% | 10% – 18% |
| Repayment Method | Reducing balance | Flat interest |
| Loan Tenure | 1 – 5 years | 6 months – 3 years |
| Loan Amount | Higher loan amount | Limited to credit card limit |
| EMI Flexibility | Lower EMIs due to long tenure | Higher EMIs due to short tenure |
| Usage Restriction | No restriction | No restriction |
Credit Card Loan: Pros & Cons
Pros:
Instant Approval: No waiting period; funds are available immediately.
No Additional Documentation: No income proof or other paperwork required.
Lower Interest than Credit Card Usage: Cheaper than directly swiping a credit card.
Convenient Repayment: EMIs can be added to your card’s monthly bill.
Cons:
Limited Loan Amount: Restricted by your available credit card limit.
Flat Interest Rate: Interest is charged on the original loan amount for the entire tenure.
Shorter Tenure: Maximum loan tenure is usually 5 years.
Personal Loan: Pros & Cons
Pros:
- Higher loan amount: suitable for large financial needs.
- Tenure for up to 7 years reduces EMI burden.
- Lower Overall Interest (Reducing Balance): Interest reduces as principal is repaid.
- No Impact on Credit Card Limit: Frees up your credit card for future expenses.
Cons:
- Longer Processing Time: Takes 1-3 days for approval and disbursement.
- Higher Documentation Requirement: Requires income proof and other paperwork.
- Higher Processing Fees: Can be costlier compared to credit card loans.
Which One Should You Choose?
Opt for a Personal Loan if:
- You need a larger loan amount.
- You want lower EMIs with a longer repayment tenure.
- You are okay with documentation and waiting for approval.
- You prefer a reducing balance interest rate.
Opt for a Credit Card Loan if:
- You need quick funds with minimal paperwork.
- Your required loan amount fits within your credit limit.
- You are comfortable with a shorter repayment tenure.
- You can manage slightly higher EMIs.
Conclusion
Financial freedom is provided by both credit card loans and personal loans. However, which one is best for you will depend on your preferred tenure, sense of urgency, repayment ability, and the size of the loan. Choose a personal loan if you require a larger loan amount with smaller EMIs. If you need instant funds with minimal documentation, a Credit Card Loan is the better choice.
Before deciding, compare interest rates, loan tenure, and EMI affordability to ensure the best financial decision.