Personal Loan or Credit Card? Pick the Best Option for Emergency

Availing personal loans and using credit cards are usually the first two options that come to one’s mind while dealing with fund shortages or financial exigencies. While both of these options have quick disbursals, their differing product features can make them more suitable option for different set of borrowers.

Here is a comparison of the features of personal loans and various financing options available through credit cards:

Interest rate: With scores of banks and NBFCs offering personal loans, its interest rate can vary widely between 10-24 per cent p.a. depending on the lender and various aspects of the applicant’s credit profiles such as monthly income, credit score, job profile, employer’s profile, etc.

Financing your spends through credit cards is interest-free as long as the entire bill is repaid by the due date. Failure to repay the entire dues on time would attract hefty finance charges of 23-49 per cent p.a. Moreover, failing to even repay the minimum amount due by the due date would further attract a late payment fee of up to Rs 1,300 per month and additionally hurt your credit score as well. 

In case, the card holder converts his outstanding dues into EMI or avail loan against credit card to finance his purchases, their interest cost would usually be higher than the personal loan interest rate available to him from the same card issuer.

Loan amount: Lenders usually sanction personal loan amount ranging between Rs 50,000 to Rs 25 lakh depending on the repayment capacity of the loan applicant. Some banks and NBFCs also claim to sanction higher loan amount of up to Rs 40 lakh.

In case of credit cards, the card issuers set credit limits for credit cardholders depending on their monthly income and credit repayment history. Credit cardholders can swipe the card or avail a loan against credit card up to the sanctioned credit limit. While the credit limit gets reduced by the amount spent through the credit card or by the loan amount availed as credit card loan, it gradually gets freed up as and when the cardholder repays the credit card dues.  

Some of the credit card issuers also offer a variant of credit card loan wherein the loan amount offered is higher than, and over and above the credit limit of the cardholder.  As the loan amount in this case does not impact the card’s credit limit, the card holder can continue making his usual spends from his sanctioned credit limit. 

Processing time: Personal loan applicants are usually required to submit their payslips/ITR forms and other documents for loan processing and approval. Since the verification process of these documents can take some time, personal loan disbursals may take up to 2-7 days. Having said that, some lenders claim much quicker disbursal of personal loans, especially in case of pre-approved personal loans offered to select customers.

Credit access through credit cards is usually instant in case of actions like swiping at POS or for making online transactions. In case of EMI conversion and credit card loans, the requests are usually processed within the same day of making applications.

Repayment tenure: Repayment tenures of personal loan usually range between 1 to 5 years, with some lenders offering minimum tenure of 6 months and maximum tenure of as high as 6-7 years. While a credit card holder can continue with his dues for as long as he wants, it is not advisable to do so as it may attract hefty finance charges. In case of loan against credit cards and credit card EMI conversions, the tenure usually ranges between 6 months and 5 years.

Processing charges: The processing fees in case of personal loans usually go up to 3 per cent of the loan amount. However, some lenders waive off processing fees as a part of special offers and/or to select consumers. In case of credit card transactions, card issuers do not charge any processing fees. However, card issuers may levy processing fee on availing loan against credit card or EMI conversion facility.

Prepayment penalty: Lenders offering personal loans on floating interest rates are not allowed to charge prepayment penalties. However, those offering personal loans on fixed interest rates charge prepayment penalty of around 2-5 per cent of the outstanding balance or prepaid loan amount. Moreover, some lenders allow personal loan borrowers to make prepayments only after the repayment of pre-determined number of EMIs.

In case of credit cards, the card issuers usually levy prepayment penalty of about 3 per cent of the loan amount in loan against credit card and EMI conversions.

Choosing between credit card and personal loan 

Opt for the financing options available through credit card if the required loan amount is relatively smaller and/or need for disbursal is too urgent to wait for 2 days or more. Else opt for personal loans as their interest costs would most likely be lower than those available through credit card loan or EMI conversions. Also, visit online financial marketplaces to find out the best personal loan offers available to you based on your credit score, monthly income and other facets of your credit profile.

The author is Senior Director, Paisabazaar.com 

DISCLAIMER: Views expressed are the author's own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.