We all agree that a financial emergency can strike at any time, thus leaving gaps in our savings that we can cover with a trustworthy credit option that makes it possible for sufficient funds to be disbursed on time. Since personal loans are among the most popular and simple loan options for paying off urgent debts, they are likely the first thing that come to mind in these situations.
But keep in mind that credit card holders do have access to an additional credit option, even though using a loan against their credit card carries a higher interest rate than personal loans. This kind of loan shares many characteristics with personal loans taken from instant loan apps.
Below is a comparison and analysis of the two loan options to assist you in making a decision:
Parameters that make you eligible for a loan
When approving a personal loan, instant loan apps and other lenders consider a variety of factors, including the borrower’s employment and employer profile, credit score, and monthly income, among other things. On the other hand, credit card issuers offer pre-approved secured loans to a particular group of cardholders based mostly on the type of card, the cardholder’s spending habits, and the cardholder’s payment history.
To get a loan secured by a credit card, borrowers must first establish a relationship with the credit card issuer; to get a personal loan, there is no comparable requirement to establish a relationship with the lender. But before you decide to take out a personal loan, remember to use the Personal Loan EMI Calculator to find out how affordable your EMI will be.
Applicable credit card loan rate vs personal loan interest rates
Usually, the borrower’s credit history and the lender determine interest rates. Interest rates on credit cards are typically 1% higher than those on personal loans. Therefore, if you can wait for the loan disbursement for at least two to three days or longer, it would be prudent to take out a personal loan because they have lower interest rates. Lowest personal loan interest rates can start at as low as 9-10% p.a.
Disbursal time and cost
Credit card loans have some of the quickest loan processing times; funds are typically disbursed a few hours after the loan application is submitted. Qualifying credit card holders who already own credit cards do not need to present physical identification because credit card loans are pre-approved. Furthermore, according to some card issuers, funding and approving these loans only takes a few seconds. To find out if they qualify for a loan, credit card holders simply need to apply online through internet banking or contact customer service. The processing fees for credit card loans vary from 1.5% to 2.5% of the total loan amount.
For their personal loan application to be processed and approved, borrowers must submit supporting documentation, such as pay stubs, income tax return forms, and KYC documents. Personal loans are typically approved two to seven days after the loan application is submitted, due to the time needed for document authentication. Processing fees can be one to three percent of the loan amount; however, many lenders from instant loan apps waive these fees on holidays or special occasions in an attempt to drive up demand.
Loan amount If the credit card issuer has approved the maximum amount, a credit card may be used as collateral for a loan. The temporary reduction of the cardholder’s credit limit to the authorised loan amount may have a negative effect on how they use the card; however, this restriction will eventually be lifted if they continue to make the loan’s EMI payments. Credit card companies have occasionally even gone so far as to offer loans that are greater than the
card’s maximum credit limit.
Although the typical amount for a personal loan is between Rs 50,000 and Rs 20 lakh, some lenders claim they can provide loans up to Rs 40 lakh. Recall that the primary determinants of how much of a personal loan is approved are its length and the borrower’s capacity to repay it. You can use the Personal Loan EMI Calculator to verify these details.
loan repayment
Most instant loan apps only offer personal loans with tenors ranging from one to five years, however some offer terms as long as six or seven years. On the other hand, credit card debt repayment terms typically range from six months to five years.
Select one of these two personal loans after weighing your options. For borrowers who expect to complete the loan repayment plan in less than a year, a credit card loan is a better choice than a personal loan. The Personal Loan EMI Calculator can confirm that although a shorter loan term will save the borrower money overall on interest costs, it will also result in larger monthly payments. Therefore, exercise caution when selecting the loan term to prevent forfeiting contributions to important financial goals in favour of a shorter duration.
payments in advance
Penalties for personal loan prerepayment may occasionally be higher than 5%, depending on the lender’s policies. Public sector banks do not penalise early repayment of personal loans because they typically offer floating Lowest personal loan interest rates instead of fixed rates. Remember that, in compliance with RBI guidelines, banks are not permitted to penalise customers who prepay retail loans with variable interest rates.
What if you are a credit card user serving a personal loan?
Its a no brainer that you ought to keep paying your credit card bills and personal loans on time. But if you have both, cost wise it makes sense to pay the credit card debt first as it has much higher rate (49%-50% p.a.) vs personal loan rates of around 9-24% p.a.
However, not paying personal loan EMIs will straightaway make you attract penalties, additional interest and at worst term you a defaulter and harm your credit score too. On the other hand, in worst case scenarios, you may pay personal loan EMIs first and pay just the minimum due on credit card meanwhile, and then as soon as possible pay the full bill when you have money.
