Personal Loan vs Credit Card: Which Option Is Better?
When you need access to funds, a personal loan or credit card may be among the options you consider. Along with this, the better choice between a personal loan and a credit card remains in doubt.
Both personal loans and many credit card facilities are unsecured forms of borrowing, meaning they generally do not require you to pledge an asset as collateral. But they function very differently in terms of process, borrowing limit, interest rate, repayment tenure, credit scoring, and more.
Making the right choice between these two becomes really important. Your decision should consider the amount you need, the total cost of borrowing, repayment period, monthly affordability, eligibility, and existing credit commitments. In this guide, we’ll be deep-diving into all things essential about the difference between a credit card loan and a personal loan.
What is a Credit Card Loan?
A credit card loan is a pre-approved loan against your credit limit.
A credit card loan is a loan or EMI-based borrowing facility that some card issuers offer to eligible cardholders. Depending on the issuer and product, the amount may be linked to the available credit limit and may be offered as a pre-approved facility.
While some of the credit card loans are available as pre-approval schemes, there are some other credit cards which may be available to the customer based on their documentation and approvals.
A credit card itself is an example of revolving credit, enabling you to utilise your available credit and repay it and use it again. But in the case of a loan through a credit card or in the case of EMI, the repayment process may be different, depending upon the terms offered by the credit card issuer.
With credit card loans, you can experience the following conditions:
- The eligible loan amount may be linked to your available credit limit and the card issuer's eligibility criteria.
- A defined loan repayment tenure that varies according to the issuer
- Interest rate is applicable to the loan amount instead of the credit limit.
- Quicker access and approvals since it uses your existing details.
What is a Personal Loan?
A personal loan is a fixed amount that remains an unsecured loan and can be repaid in the form of monthly EMIs.
A personal loan is a type of loan where the amount sanctioned by the bank or NBFC is paid back to the borrower in the form of regular instalments. Personal loans are mostly unsecured in nature.
In comparison to a credit card loan, a personal loan is more likely to offer an established loan amount in a one-time disbursement, which is then paid off by instalments as per a fixed tenure. The terms and conditions associated with the credit card loan may vary depending on the issuer.
With a personal loan, you’re likely to get the following -
- A potentially higher loan amount based on your income, eligibility, and repayment capacity.
- A defined interest rate and scheduled EMIs, with terms determined by the lender.
- A predetermined repayment tenure, with tenure options depending on the lender and product.
- A one-time loan disbursal, with repayment through scheduled instalments.
Personal Loan vs Credit Card Loan: Comparison Table
| Parameter | Credit Card Loan | Personal Loan |
| Nature of Credit | Usually a defined loan or EMI facility | One-time and fixed disbursal |
| Loan Amount | Limited to the available credit limit | Generally higher, based on eligibility criteria |
| Interest Rate | Often higher | Comparatively lower |
| Repayment Tenure | Short-term | Longer tenure and more flexible repayment options |
| Documentation | Minimal documents needed | Requires income and KYC documents |
| Disbursal Speed | Usually quick, since it uses an existing credit card | Depends on verification and lender policies |
| Best Suited For | Small and short-term financing needs | Larger and planned expenses |
Pros and Cons: Credit Card Loan vs Personal Loan
| Option | Pros | Cons |
| Credit Card Loan |
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| Personal Loan |
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Credit Card Loan Interest Rate vs Personal Loan Interest Rate
One of the biggest differences between a personal loan and a credit card remains the interest rate.
A credit card loan can be expensive compared to borrowing from a personal loan, especially in cases where the balance from the credit card is not cleared or in cases where there are certain facilities for borrowing from a credit card that have high costs.
A personal loan interest rate remains highly competitive in comparison to credit cards. The reason is that it remains fixed-term and structured with defined repayment.
If you’re borrowing a larger amount for a longer time period, the personal loan seems to be a much better choice. If you have small and short-term needs, the credit card loan is a suitable option.
Key Things to Consider Before Choosing
- Amount needed: If you need a smaller loan amount, a credit card loan may be sufficient. For bigger expenses, a personal loan offers a higher loan amount.
- Cost of borrowing: Compare the personal loan interest rate against your credit card loan interest rate before deciding.
- Loan tenure preference: Choose a personal loan if you’re comfortable with a longer repayment tenure. Choose a credit card loan for short-term financing you can repay quickly.
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Conclusion
Hence, when it comes to personal loan vs credit card, both are there to help with immediate finances. A credit card loan is comparatively quicker, more flexible, and better for planned expenses.
Once you’re clear on the differences between the two, the decision becomes simple. Regardless of which choice you make, responsible borrowing and repayments are essential since your borrowing and repayment behaviour can impact your credit profile.
Read more:
What is a Personal Loan? Complete Beginner's Guide
Top Reasons Why Personal Loan Applications Get Rejected
Frequently Asked Questions
Which has a lower interest rate between a personal loan and a credit card loan?
A personal loan generally has a lower interest rate in comparison to a credit card. A personal loan remains a fixed, defined, and structured borrowing option.
Does taking a credit card loan affect my credit score?
Yes, it can affect your credit utilisation ratio if a large portion of the credit limit is used. This can have a negative influence on the overall credit score.
Can I get a higher loan amount with a personal loan than a credit card loan?
Yes, the personal loan amount can be higher because it depends on your income and eligibility. On the other hand, the credit card loan amount remains tied to the limit.
Which option is faster to access between a personal loan and a credit card loan?
When it comes to loan processing and approval speed, credit card loans are a better choice. A personal loan application might take longer, depending on verification and lender policies.
Can I use a personal loan to pay off a credit card loan?
Yes, but the decision to take a personal loan to pay off a credit card loan depends entirely on your repayment capacity and interest rates. It’s better to compare everything before making a decision.
Is there a minimum credit score needed for either option?
Yes, most lenders expect a good credit score for a personal loan or credit card loan, as it increases the chances of approval.
What happens if I miss an EMI on either option?
If you miss an EMI on a personal loan or credit card loan, there can be late payments, which can impact your credit score too.
