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May 16, 2016 04:26 PM IST | Source:

Credit card loan or personal loan: Which scores higher?

Understand your borrowing needs and your future cash flows. Also figure out the product offering – credit card and personal loan, before taking a decision

Adhil Shetty

When Pratik wanted to do up interiors of his newly purchased apartment, the only way out for him was to take another loan to meet the financial requirement.

He decided to choose between the two most popular loans that are handy for anyone in need of immediate money: Personal loan and credit card loan

His bank offered him a personal loan of 5 lakhs. The credit limit of his card was only 2 lakhs. Here is how he decided.

Yardstick 1: Application Process

Both loans are offered after due diligence, but credit card loans are easily available. While he can apply for a personal loan online, he will have to submit his payslips, Form 16, bank statements and KYC documents for getting the loan application physically processed.

Also, the process may take 48-72 hours, and it can even go up to a week in some cases.

For a credit card loan, all he has to do is to dial up the customer care number of his card and request for a loan. The amount requested will be credited to his account within 24-48 hours.

Yardstick 2: Processing fee and Pre-Closure Charges

Both personal loans and credit card loans come with 0.5-1% processing fee. This means, if he is taking a loan of 2 lakhs, he will have to pay Rs.1000-2000 as processing fee. Both loans come with pre-closure charges of 2-5% of the principal outstanding.

Credit card loans come with an option of lower tenure, with tenures as low as 6 months available. On the other hand, most banks offer personal loans for minimum 12-24 months.

Yardstick 3: Quantum of Loan

If one needs a small loan, credit card loans come in handy. On the other hand, if one needs more money, personal loan is a better option, as the credit limits of cards are usually limited.

Yardstick 4: Interest rate

This is the most important yardstick for comparing personal loan and credit card loan options. Personal loans usually come between an interest rate of 13-22%, while credit card loans are offered at 10-18%.

If someone is being offered a deal of 10% on his credit card, it apparently looks more attractive than a personal loan offered at 16%. But the caveat here is that credit card loans are offered at flat interest rates, while personal loans are offered at reducing balance rates.

The conclusion

After comparing the two loan options, Pratik decided to go for credit card loan. The reason was that, his fund requirement was only 1.5 lakhs and for a short tenure of say 6-8 months.

He was expecting his yearly incentives within 6 months and he could easily close the loan as soon he got the incentive. So, a credit card loan at a flat rate appeared to be a much better option for him than a costly personal loan at reducing balance rate.

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