“Congratulations! You are eligible for a personal loans of Rs. 1,00,000/-!” Many of us are receiving this luring SMS alert from banks quite often. No wonder, the moment you face any urgent financial requirements like your children’s higher education, marriage or down payment for a new property, this option comes to your mind. It’s true that there is no time for a second thought during times of financial emergencies. But pause for a while, and see which is the better- a credit card loan or a personal loan?
Credit Card Loans and Personal Loans: Similarities
Both credit card loans and personal loans are unsecured and can be availed for any short term. Interest rates are higher and almost similar for both options as the lender is not taking any security against the loan amount paid to the customer. Both loans can be pre-closed at any time, easy to avail and can be availed during times of any financial emergencies.
However, many consumers are confused whether a credit card loan or a personal loan is a better option as both debt forms look almost similar. On the other hand, many people have a misconception that credit card loans are costlier than personal loans and therefore should be avoided. So let’s have a closer look at the essential differences between these two debt forms
Difference between credit card loans and personal loans
Loan Processing: Even though you get SMS alerts that you are eligible for a preapproved personal loan, banks usually follow all the paper works and due diligence check before disbursing your loan amount. You will have to submit KYC documents as well as your income documents and bank statements to the bank. The bank initiates all the necessary credit verification including the CIBIL report check which will take almost 4-5 day’s time to disburse the requested loan amount.
Credit card loans on the other hand are instant loans as the card company has conducted the due diligence at the time of applying for the card, and fixed your credit limit based on that. As long as you have a good repayment track record with the credit card company, you can avail instant loans from them. All you need to do is to call up the customer care number to request for the approved amount, which you can either swipe or avail as a DD from the credit card company within 2-3 working days, depending on the nature of the card you hold.
In both cases you can repay the amount availed as EMIs.
Interest Rates: Some credit cards offer 0% interest for EMIs up to 6 months. However, most card companies’ offers loans on a monthly interest rate, ranging from 1.5% to 2.5%. Personal loans on the other hand charges 16% to 18% interest rate or even higher based on customer profile and employer.
Processing fees and pre-payment: The processing fees of personal loans vary from 0.5% to 1% of the loan amount availing, while most credit card loans are free of processing fee.
Personal loans also attract pre-payment charges which would vary from 2% to 5% of the outstanding balance at the time of closure. Credit card loans are free from pre-payment charges, so that you can close it whenever you have surplus cash, with no additional charges.
Things to note:
- The interest rate mentioned by some credit cards will look attractive on a monthly basis, however, you when charged on an annualized basis, it will higher than a personal loan
- Delay in payment or default in credit card loan can cost you more, as you may have to pay interest for both the EMI amount as well as the outstanding amount.
- Most credit card loans are offered on a flat interest rate, which means you need to pay interest for the entire loan amount throughout the loan tenure. This can effectively cost you higher than a personal loan.
Considering all these, the key is to make a careful study of all available options before making a decision. Personal loans of all forms are quite tempting as it can be availed easily, but always try and see if you can adjust with your existing funds more efficiently for urgent requirements.
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