One should pick either of the options only after fully understanding one's purpose of borrowing along with one's repayment capability.
For numerous people Credit card loans, along with personal loans, have become a way of life today.
Borrowers prefer to go for these two types of loans whenever they need funds for something. However, while taking a loan, most people face the problem of choosing one option – should they opt for a personal loan or go for a loan on their credit card? Which could get them the lowest interest rate?
Industry experts, however, suggest choosing the type of loan totally depends on the requirement of the borrower, and should not only be based on interest rates offered. Both these types of loans come with their own set of advantages and disadvantages. Hence, one should pick either of the options only after fully understanding one’s purpose of borrowing along with one’s repayment capability.
Credit card loans, for instance, come as a pre-approved loan and offer loan up to the maximum limit of a credit card. However, it is not the same as cash withdrawals at an ATM.
Personal loan, on the other hand, is an unsecured loan which is generally taken for an expensive purchase, or medical emergency, clearing pending debt, a vacation, or even marriage. With a personal loan, there are no restrictions on what you can do, which makes it attractive for many.
Personal loans, according to experts are ideal if a large sum of money is needed. Credit card loan option might be better, in case of smaller amounts. However, know that your credit limit will be blocked temporarily to that extent.
Compare the specification before of these loan options opting for one;
1. Eligibility of loan: In the case on a personal loan, banks approve loan application only after conducting a background check on the borrower’s financial capability which includes professional details of the borrower, the borrower’s financial credibility, along with his/her credit history details. The bank this way finds out whether you will be in a position to repay the loan in the future or not.
In case of credit card loans, it can be easily availed against the unused credit limits on any credit card. No further documentation is needed to get this loan. This is the fastest way to get funds. Not all customers get eligible for this loan.
2. Interest rate: This is one of the most important points to keep in mind while opting for a loan. In the case of personal loans, the interest rates range between 13 and 22 percent. The rate of interest depends on the borrower’s credit history. If you have a good credit history and not many outstanding loans, there are chances you could also get a lower interest rate. Some banks also offer reducing balance rates on personal loans.
On the other hand, credit card loans are offered at an interest rate ranging between 10 and 18 per cent. Industry experts suggest one an also negotiate a lower interest rate if one is already a customer with the company, given one has a matching repayment track record.
3. Documentation and Disbursal: A credit card loan, does not require any documentation, as the borrower is already a customer with the credit card company. The loan amount disbursal, in case of a credit card loan, could be immediate, if the borrower holds a savings account with the same bank which is convenient in case of an urgent need for an unsecured loan.
You have to provide a set of documents, in case of personal loan such as your identity proof, bank statement of last six months, ITR of the last 3 years, along with PAN, and address proof, for both salaried or self-employed. In the case of a personal loan, the loan disbursal takes longer as it requires documentation and has a due process. According to industry experts, one should apply for a personal loan for financial requirements and not during emergencies with a time constraint.
4. Loan amount: The borrower should choose the loan amount depending on his/her cash requirement for the financial need. One can opt for a credit card loan if one needs a small amount. The loan amount, however, will depend entirely upon the borrower’s credit card limit. The loan application can also get rejected if the loan requires that the borrower has applied for is more than his/her card limit.
The loan amount of a personal loan ranges from as low as a few thousand rupees to a couple of lakhs. Hence, a personal loan gives you greater leverage. The amount is decided by the borrower’s credit profile and repayment capability. In case of a medical emergency, such loans can be opted for.
5. Tenure: Personal loans, comes with a repayment period ranging from anywhere between 1 and 5 years, which gives the borrower sufficient time to repay his/her debt.
Credit card loan, on the other hand, has a shorter repayment period ranging from six to 36 months. Hence, it should be used for small purchases.