Credit Card vs Personal Loan - Personal Loan Blog - Tata Capital

Credit Card V/S Personal Loan

Feb 28, 2017

There is no denying that credit cards are very convenient, when it comes to payment as well as ability to defer repayments to match personal cashflows. But it is also important to note that credit cards are nevertheless, a form of loan. So like all other loans, the interest has to be paid to avail the credit facility.

Many people prefer to take personal loans to pay for their expenses instead of using credit card. So what should be the factors that should be considered while choosing between personal loan or credit card?

In this article, let's evaluate both the options objectively.

Interest Rates: Unlike home loans, both credit card and personal loans are expensive when it comes to interest rates. But rate of interest on personal loans is significantly less than that on credit cards. Personal loans are available from 15% to 25%, depending on borrower's credit worthiness and other factors. Credit cards on the other hand charge anywhere between 30% to 50% per annum. This makes credit cards extremely costly form of loans.

Eligibility: Credit limit on credit cards are already set, depending on the nature of card you have and repayment capacity at the time of card application. Personal Loans on the other hand require credit analysis by the lenders that take into account your nature of employment, current credit score, currently monthly income, existing loan obligations, tenure of loan etc.

Sanction: Using credit card is like using the loan money. Just in this case, the loan (credit limit) is preapproved and hence, there are no processing hassles. All credit checks, etc. have been already made. There are no documentation requirements everytime you borrow on your credit card. Personal loans are different and require some amount of processing that can take upto a week at times.

Loss of Credit Limit: The credit limit of the card is blocked upto the amount of money that you have utilized. The limit slowly increases as you repay some part of your credit card outstandings. Personal loans on other hand have no such linked limits that gets reduced. On the other hand if you use your personal loan amount, there is no reduction in other existing credit card limits. You just need to make sure that you are able to pay your personal loan EMIs as well as credit card bills on time.

Which ones of the two to choose, depends on just a few factors.

Credit card is a quick, immediate and hassle free form of loan. But it is exorbitantly costly, if you cannot clear your dues within the interest-free period. But it's the best option in case of emergencies. In case you can wait for few days, then you can instead take personal loan that are much cheaper and more manageable than having high-cost credit card debt.