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To take a personal loan or borrow against a credit card? Here's how you must decide

The repayment tenure and the loan size must be the main deciding factors

April 27, 2021 / 10:16 AM IST

Personal loans and credit card loans share the common advantages of quick disbursal, no collateral and zero restriction on end-usage of funds. Hence, choosing between the two can prove to be a confusing task for many.

Let us understand these loan options closely and make an informed choice.

Loan eligibility

Lenders factor in several facets of the applicant’s credit profile while evaluating their personal loan eligibility. Chief amongst these are applicant’s monthly income, credit score, other loan obligations, job stability and employer profile. On the other hand, loan against credit card is a pre-approved debt sanctioned by credit card issuers to select existing holders primarily on the basis of their spending pattern, card type, credit limit and bill repayment history.  Banks and NBFCs lend personal loans to both their existing customers as well as others, subject to the fulfilment of loan eligibility criterion.

Also read: Feeling cash strapped? Here are 4 secured loan options that come at low rates


Loan amount

A personal loan can range anywhere between Rs 50,000 and Rs 25 lakh. Some banks and NBFCs claim to sanction higher loan amounts of up to Rs 40 lakh. The sanctioned loan amount primarily depends on the borrower’s repayment capacity and loan tenure.

In the case of credit card loan, the amount can only be availed up to the pre-determined limit sanctioned by the issuer. The credit limit is temporarily blocked up to the sanctioned loan amount at the time of loan disbursal, which eventually gets freed as the borrower keeps paying the EMIs of his credit card loans. However, some credit card issuers also offer a variant of the loan against credit card to a select card users wherein the loan amount is over and above their credit limits.

Processing time

Personal loan applicants are required to submit their ITR forms/payslips and other documents for loan approval. Given that the verification of these documents tends to take some time, personal loan disbursals may take up to 2-7 days. However, some lenders claim to offer much quicker disbursal of personal loans, especially in the case of pre-approved personal loans.

As credit card loans are pre-approved in nature, they are usually disbursed within the same day of making loan applications. These loans are usually disbursed within just a few hours of submitting the loan application, with some card issuers claiming to offer near instant disbursal.

Also read: Tax tasks you must complete in April itself

Interest rate

The interest rates of personal loans can range anywhere from around 10 percent-24 percent p.a. depending on the lender and the applicant’s credit score, monthly income, job profile, employer’s profile, etc. Similarly, the credit card issuers also factor in the card holder’s card repayment history and other aspects of his credit profile while setting his interest rate.

However, the interest rate of loan against credit cards have been found to be a notch higher than the personal loan interest rate offered by the same credit card issuer to the same credit user.

Also read: Gone bankrupt and unable to repay loans? Know how to file for insolvency

Processing charges

The processing fee in case of personal loans can usually go up to 3 percent of the loan amount. In case of loan against credit card, processing fees can go up to 2 percent-2.5 percent of the loan amount for most lenders. Hence, before zeroing in on the loan option, compare the processing fee levied on personal loans with that of loan against credit card as this fee can make a significant difference in the overall cost of the loan, especially in case of larger amounts.

Bottom line: Choosing between the two

Existing credit card users who have immediate requirement of smaller loan amounts and can repay their loan within a shorter tenure should opt for the loan against credit card. Personal loans would suit those looking for bigger amounts with longer repayment tenure. The lower interest rates charged on personal loans would additionally help in reducing the overall interest cost for the borrower.

While choosing between these loan options, first compare the features of personal loan and credit card loans offered by your credit card issuer(s). Follow it up by comparing the personal loan features offered by banks and NBFCs with whom you have existing consumer relationships. Then, visit the online financial marketplaces to compare the features of personal loans offered by other lenders based on your credit score, income, employer’s profile and other loan eligibility criterion. Opt for the one which costs you the least based on your loan tenure.

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Naveen Kukreja is CEO and Co-founder,
first published: Apr 27, 2021 10:11 am
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