Credit Card Loan vs. Personal Loan: Calculate the Difference

When it comes to taking loans, people are often confused between taking a loan against credit cards or taking a personal loan. There are advantages and disadvantages to both options, and proper research is necessary before making a decision on what type of loan you will take. The terms and conditions on interest and repayment can impact your savings and your financial future, so it is important to understand the difference between a credit card loan and a personal loan. This article gives you information about these two types of loans so you can compare them and choose the best one for your income and financial needs.

Credit Card Loans

Credit card loans are essentially pre-approved loans that require no documentation. Procuring credit through credit card loans is the fastest way to get an unsecured loan. A portion of your credit card balance that has not yet been used by you is made available as a credit card loan. It is important to note that borrowing through credit cards is not the same as withdrawing cash from one’s bank account.

Pros of Credit Card Loans

• Credit card loans give people with bad or low credit the chance to slowly improve their credit terms.
• With credit card loans, an ongoing revolving credit balance with interest is only charged when the money is used.

Cons of Credit Card Loans

• Interest rates on credit card loans are much higher than those on personal loans.
• Interest and fees may add up and drastically impact the user’s savings.

Personal Loans

Personal loans are secured or unsecured loans that are used to fund a variety of expenses, such as medical costs or expensive purchases such as buying a vehicle, paying for a wedding, taking an expensive vacation, and so on. Unsecured loans are loans that are not backed by collateral.

Pros of Personal Loans

• Personal loans are the ideal option when the amount of money to be borrowed is comparatively large.
• Personal loans usually offer lower interest rates than credit card loans.

Cons of Personal Loans

• Personal loans usually include a service charge, and there may be additional charges that are added.
• In case of non-compliance with the terms of a secured personal loan, the concerned authorities have the right to seize the collateral used to secure the loan.

Differences Between Personal Loans and Credit Card Loans

While there are many similarities between personal loans and credit card loans, such as interest rates, there are also many differences between the two types of loans. Some of the significant differences include:

1. Documentation: While a personal loan requires thorough documentation to get approval and can often take up to three to five days to be approved, credit card loans do not require any such documentation and take much less time for the money to be made available to the borrower. 
2. Interest: In most cases, the interest to be paid is one of the crucial determinants of a loan. The interest rates of most personal loans vary from 13% to 22%, while the interest rates for credit loans range from 10% to 18%. a) An important distinction to be made is that while personal loans are accessible at declining rates, credit card loans can be obtained at flat rates. b) In the case of a flat-rate loan, the monthly interest is applied to the initial loan, and it stays constant over its lifetime, even if the principal money reduces. c) However, in the case of reduced balance loans, the interest to be paid decreases along with the principal.

3. Security: While credit card loans are only unsecured loans, personal loans can be secured or unsecured. Having the option of a secured loan gives people with a bad credit score the option of getting access to a loan. It must be noted, however, that in the case of non-payment of a secured personal loan, the customer holds the risk of losing his or her collateral to the concerned authorities. 
4. Repayment: For personal loans, the amount to be repaid is the same every month, as EMIs. For a loan against credit cards, there can be a variation in the monthly amounts to be repaid. 
5. Loan Amount: The loan amount to be taken can be the determining factor in choosing either a credit card loan or a personal loan. If a small amount is needed, a credit card loan is preferable. If the amount to be borrowed is large, a personal loan is recommended. 
6. Eligibility: While non-bank account holders can apply for personal loans, only selected cardholders who meet certain conditions can opt for credit card loans. 
7. Borrowing Limit: The borrowing limit on credit card loans depends on the pre-approved limit, whereas the borrowing limit on a personal loan is calculated by the bank depending on the borrower’s income and credit score. 
8. EMI: EMIs for the specified period are applied to the monthly credit card statement in credit card loans. Under personal loans, EMIs are paid on a monthly basis to the bank for a specified tenure. 
9. Approval Time: Credit card loans take around 24 hours for approval, whereas personal loans can take several days to complete the approval process. 
10. Disbursement: For credit card loans, the loan amount is directly credited to a savings account or current account (if held with the same bank) or issued as a check. For personal loans, the loan amount is paid in a single amount to the borrower’s checking or savings account.

Conclusion

Personal loans and credit card loans are both quick and easy ways to get access to money. Selecting the right type of loan that meets your requirements and is pocket-friendly can be challenging without all the information, including the pros and cons of both loans. Piramal Finance can make this decision-making process easy by providing you with detailed information and guidance on different types of loans and the easiest ways to select the loan that is best for you. Visit Piramal Finance to read more helpful articles like this one and stay up-to-date on credit card loans and personal loans.