Credit Card Loan Vs Personal Loan: Which to Choose?

When it comes to borrowing money, there are a variety of options available to you. Two popular options are credit card loans and personal loans. Both have their own set of advantages and disadvantages, and the right choice for you will depend on your specific financial situation and needs. When deciding between a credit card loan vs personal loan, it's important to consider factors such as interest rates, repayment terms, and credit score requirements.

Credit card loans are typically easier to obtain, but they often come with higher interest rates. Personal loans, on the other hand, may have lower interest rates, but they may be more difficult to qualify for. It's important to carefully consider both options and determine which one is the best fit for you.

What is a credit card loan?

A credit card is used to make purchases which can be paid later. A credit card loan is a pre-approved loan offered by the issuer whose credit card you already use and is based on the existing credit limit that has been allocated to you.

What is a personal loan?

A personal loan is an unsecured loan that can be used for diverse purposes like higher education, buying an appliance, sponsoring your vacation, paying medical bills, funding your vacation, etc. It is easy to get and comes with a flexible repayment tenure that often ranges from 12 to 60 months.

Credit card loans vs Personal loans: Key Differences

Now that you know the high-level definitions of each, let us take a look at the key differences between a personal loan vs a credit card loan.

	Credit Card Loan	Personal Loan
Type of Loan	A credit card loan is an unsecured loan that requires no collateral of security	A personal loan is an unsecured loan as well, however, it requires you to prove your capability to repay it
Documentation	Since it is a pre-approved loan, there is no additional documentation required to avail of it	Personal loans, in general, require KYC documents (such as PAN Card and Aadhaar Card), and identity and address proofs, such as Passport, Driver’s License, Voter ID, etc. Furthermore, they also require financial proof such as recent bank statements, salary slips, income tax returns, etc.
Amounts	A credit card loan is based on the overall limit of your card and the unused portion of it. This is why credit card loans are smaller amounts, usually in the range of ₹50K to ₹2.5L	A personal loan comes in various types and can vary highly. You can get as low an amount as ₹50K to as high as ₹25L.
Rate of Interest	The rate of interest directly impacts your EMI. In the case of a credit card loan, it usually hovers in the range of 12-22%	For a personal loan, the interest rate can be in the range of 15-26%. However, there are options for reducing balance interest rates
Reyament Tenor	Since the amounts are lower, the repayment term of credit card loans is lower as well	Personal loans are more flexible and can be repaid in a longer duration of up to 5 years (or more)
Key factors considered	The limit of your existing card, card usage pattern, and history of repayment are the key factors that determine your eligibility for a credit card loan	A key factor for a personal loan is your credit score. Other considerations include your monthly income, ongoing loans, the type of loan being applied for, and the city you live in.
Processing Time	Since you are an existing customer of the company and all your KYC details already exist with the issuer, a credit card loan is almost instantly approved and disbursed	A personal loan is quicker than other forms of credit such as a home loan. However, it can take a few days for the lender to verify your documents and process your application

When we compare a personal loan vs credit card for debt consolidation, a personal loan is generally a better option as it typically offers a lower interest rate and a fixed repayment term, making it easier to manage and pay off the debt.‍

Note: The table is just a suggestion and may not cover all aspects of Credit Card Loan Vs Personal Loan.

Summing it up

As you can see, in the comparison of credit card loans vs personal loans - there is no clear winner. A credit card allows you to pay bills, purchase items, and pay for them later. On the other hand, if you require a larger amount, then a personal loan is the right way to go. Since both are unsecured loans, personal loans come with a slightly higher rate of interest. However, they also come with a longer repayment tenor that helps keep your monthly EMI manageable.

Frequently Asked Questions

1. Are personal loans better than credit cards?

‘Better’ is defined by your own specific requirements. If your need is of a higher amount, then a personal loan is better. If your need for cash is immediate and you can not wait even a few days, then a credit card loan may be right for you.

2. Is it worth taking a loan on a credit card?

If your need is of an amount in the range of ₹25K to ₹2.5L and it is urgent, then a credit card loan might be the apt choice for you. It has a reasonable rate of interest that will not pinch you too much. However, do note that the repayment window is usually low and you must be in a position to pay your EMIs on time to avoid late charges and other penalties.

3. How does a credit card loan differ from a personal loan?

A credit card loan is a pre-approved loan that requires no formal application process or additional documents to support it. It is almost instantly approved and immediately disbursed making it one of the fastest types of credit products in the market. On the other hand, personal loans take more time comparatively and are taken for much larger amounts that can be conveniently repaid over the next 4-5 years.

4. What is the disadvantage of a personal loan over a credit card?

Compared to a credit card, a personal loan usually has a higher interest rate and fixed repayment schedule, which can make it less flexible and more expensive. Additionally, taking out a personal loan can have a negative impact on your credit score if you fail to make payments or default on the loan, whereas using a credit card responsibly can help you build or maintain your credit score.

5. What is the advantage of a credit card over a personal loan?

One advantage of a credit card over a personal loan is the flexibility to borrow and repay as needed, with no set repayment schedule. This can be useful for managing unexpected expenses or short-term borrowing needs.

6. Is credit card or personal loan better for credit score?

A personal loan is generally better for credit score as it can improve credit mix and diversification of credit, whereas credit card usage can result in a higher credit utilization ratio, which can negatively impact credit score.