Credit Card Loan vs Personal Loan: Which is Better

Credit cards, personal loans, small-ticket personal loans, and payday loans disbursed via digital platforms are some of the handy credit solutions to meet the fund shortfall. Every other person wants to obtain credit at the cheapest rates possible as a lower rate of interest cumulatively reduces the net interest payment over the course of EMI payments.

Using a credit card is much simpler as compared to obtaining a personal loan. However, the personal loan approvals are achieving pace with the incorporation of digital mechanisms to gauge the eligibility of the users and for doing the basic KYC formalities.

The number of people using a credit card has been fairly increasing year after year with the massive push from the lenders, as well as the customers’ willingness to obtain the plastic.

According to the Reserve Bank of India data, there were more than 7.87 crore credit cards at the end of June 2022. This is 25.32% higher than the year-ago figure of 6.28 crore credit cards. Surprisingly, there were only 1.80 crore credit cards at the end of June 2012.

The figures showcase a sizable growth in the credit card market, while it still remains underpenetrated given the huge population size of nearly 140 crores, of which at least one-tenth of the individuals might pass the eligibility for a credit card.

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Loan vs Credit Card: Definition

A credit card is simply an unsecured credit facility bundled in a plastic card that can be used at point-of-sale (POS) kiosks, online merchants and for withdrawing money from ATMs. Each credit card carries a definitive credit limit that is authorised by the bank on the basis of earnings potential, credit score, repayment history and the existing sum of liabilities. Banks prefer to extend a credit card to customers with a higher credit score.

A personal loan is also a form of unsecured credit facility through which a borrower gets the money without any collateral. The rate of interest levied on personal loans is unusually high as compared to a home loan, car loan, loan against securities or loan against property. Individuals with a high credit score are favoured. However, subprime customers are also eligible for personal loans at a higher rate of interest.

The Requirement and Usage

Identifying the end requirement of funds and the urgency of the requirement can help you decide whether you should spend through a credit card or you should apply for a personal loan and service the EMIs. However, credit card spends can be either repaid in its entirety on or before the credit card bill payment due date or can be converted into EMIs.

Both the credit products offer the services of EMIs. The differentiation lies in the applicable rate of interest. Usually, the rate of interest on credit card EMIs is a notch higher as compared to the rate offered on a personal loan.

For small-ticket transactions, you should preferably select credit cards and club the best possible offers to get the best deal, while a personal loan can be a nifty proposition if you need a huge sum.

For example, credit cards are the most preferred mode for a transaction when it comes to shopping via online retailers, as well as a bunch of offline stores as you get the best deal. Assuming you have to purchase a smartphone for Rs 70,000. You can effectively utilise a credit card for purchasing the smartphone as you can rightfully get a no-cost EMI option on some credit cards, while some credit cards offer a straight discount of 10 to 22.5% on the purchase of electronics and gadgets.

Such arrangements can really sweeten the deal as you will end up paying a much lower amount. On the other hand, the option of a personal loan can be costlier for you as you’ll be mandatorily required to service the loan that contains a definitive proportion of interest charges and processing fees.

Furthermore, a credit card provides you with ease of transaction as it takes only a couple of dozen seconds to complete the payment. While obtaining a personal loan can be a lengthy process as you have to wait for at least 2 days to some weeks. With the facility of instant personal loans, you can get the funds within 5-10 minutes, but this service remains exclusive to a select number of customers who have a super prime credit score, and they flaunt a copy-book definition of healthy repayment history.

On the contrary, a personal loan can be very useful when you need a large amount for multiple purchases, renovation, debt consolidation purposes, etc. The rate of interest for personal loans stays a little less than the interest rate levied on credit card EMIs in most cases. However, the processing fees and documentation charges could be higher in the case of a personal loan.

In order to fund your requirement through personal loans, you have to plan well in advance as it may take a couple of weeks to more than 15 days for in-principal approval, the final disbursal and credit into the bank account. Instant personal loans are quick, as far as the duration of the disbursal process is concerned, but such facilities generally offer small-ticket finances.

Conclusion

A personal loan would be a great fit to meet the fund shortfall if the monetary requirements are beyond the credit card limits and if you are getting a better deal on the rate of interest on credit cards and processing fees. Moreover, servicing a personal loan happens to be more conventional, unlike repaying a credit card EMI, as clearing off credit card dues will open up your credit limit, and it might entice you to spend more beyond your repaying capacities.

While a credit card can be exceptionally advantageous when it comes to online purchases, electronics, apparel, gadgets, small furnishings, etc. Also, you can earn reward points and bonus points while transacting through a credit card if you can manage to repay the bill within the interest-free period of 45-50 days.