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Credit card loan vs personal loan: Key differences explained

Credit card loan vs personal loan: Key differences explained

Whether you are facing a financial emergency or just want to make a major purchase, having cash in hand can be a major financial advantage. Of course, you can always liquidate your savings or investments, but doing so is not always possible or recommended. That’s when options like a personal loan or credit card loan come into the picture. Both personal loans and credit card loans are convenient ways of borrowing money without dipping into savings.

However, there are important differences between the two loan options. The question of credit card loan vs personal loan is an important consideration, as one option may be better for your personal financial circumstances. Here’s a quick breakdown of the pros and cons of each option, and which one might be right for you based on both long-term and short-term considerations.

Personal loan vs credit card loan

Let’s go through some of the main factors that you must consider while deciding between credit card loans vs personal loans:

  • The loan amount
    Your loan amount will be equal to your card’s maximum available credit limit. This means you can easily determine your loan amount by checking the status of your credit card. Meanwhile, personal loans tend to provide larger but more variable loan amounts. Loans are subject to your credit score, annual income, and eligibility.
  • Rate of interest & repayment

Credit card loans tend to have higher interest rates than personal loans. When it comes to repayment, credit card loans allow for greater flexibility. You can repay the loan in multiple installments or in lump sum payments. Personal loans usually have a fixed repayment schedule (EMI), though some lenders offer greater flexibility.

  • Approval

Credit card holders can generally get instant loan approval, provided their card still has a pending credit limit. Credit card loans can also be availed of without any additional paperwork or documentation. Personal loans, on the other hand, may require paperwork and documentation to initiate the approval process. While some lenders, such as Tata Capital, offer faster approvals, credit card loans are generally the quicker option.

  • Credit score impact

Personal loans affect your credit score in a more stable and predictable way. You might see a dip in your credit score upon first applying for a personal loan, but regular EMI repayments will steadily improve your score over time. On the other hand, credit card loans increase your credit utilization ratio, which negatively impacts your credit score. Additionally, paying only the minimum amount is ill-advised, as it prolongs debt and worsens your credit. In short, personal loans are more credit score friendly. 

  • Tenure

One of the main factors in deciding between credit card loans vs personal loans is their tenure. Credit card loans are short-term and emphasize providing an easy way to access cash with minimal paperwork. Personal loans offer long-term repayment via EMI, though some lenders may allow early repayment.

Table of differences between credit card loans vs personal loans

DifferencesCredit card loanPersonal loan
AmountEqual to maximum credit limitAmount varies as per approval and credit score
Credit score impactHigh impactMedium to low impact
ApprovalInstant approvalFast approval but may take time to finish documentation
Interest rateHighMedium to low
Use caseShort-term financial emergenciesShort- or long-term financial emergencies or for significant purchases

So, are loans on credit cards good or bad?

Credit card loans are best used for short-term financial goals; however, they are not ideal if you cannot repay the loan amount quickly. Delays in payment will significantly impact your credit score. Personal loans shine if you think of them as a long-term financial instrument. You can comfortably repay your personal loan as per the stipulated EMI.

So, to answer the question of credit card loans vs personal loans, one needs to consider their own personal financial needs. For quick and easy cash access, choose credit card loans. But if you are comfortable with long-term repayment, a personal loan is the better option. If you are interested in applying for a personal loan, contact Tata Capital to find out more about the approval and disbursement process.

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FAQs

Does taking a credit card loan increase credit utilization?

Yes. A credit card loan uses your available credit limit, which increases your credit utilization ratio. High utilization (above 30%) can negatively impact your credit score if it is sustained for a long time.

Will applying for a personal loan reduce my credit score?

Applying for a personal loan may cause a small, temporary dip in your credit score. However, consistent on-time EMI payments can help improve your credit score in the long term.

What factors affect personal loan approval?

The main factors that affect personal loan approval include your credit/CIBIL score, your past credit history, your monthly income and job stability, the required loan amount, tenure selected, and the current market conditions.
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