Which Is Better, Personal Loans or A Credit Card Loan?
Which Is Better, Personal Loans or A Credit Card Loan?
It depends on your credit situation and your requirement.
Features of a Personal loan
End Use: A Personal Loan is an unsecured loan, using which you can meet your immediate needs—which could include anything from home renovation, a vacation, to keep your business afloat, to recover from sudden income loss or a medical emergency. Its end use is not restricted which makes it a great option to fund any legitimate purpose.
Eligibility: Before approving your loan application, banks do a background check on your professional details, your financial credibility and your credit history to arrive at a lending decision—whether you can repay the loan or not.
Interest rate: It is also one of the costliest loans in the market. Its interest rate could go anywhere up to 30% per annum or even more, depending on your credit situation is. If you have a solid credit history, a low debt-to-income ratio (few loan obligations) along with a good net income, then you would be offered a personal at the lowest interest rate possible, which starts at 11% p.a.
Loan amount: The personal loan amount could range from a few thousand rupees to a couple of lakhs. With a personal loan, you could apply for a large lump sum amount – depending on your repayment capability and credit profile. This could come in handy if you need a larger amount, say for a surgery. The loan approval is subject to eligibility check and credit check, amongst other background verifications.
Tenure: The repayment period can range between 1-5 years.
Features of a Credit Card Loan
End Use: You can use your credit card loan for any purpose, there are no restrictions on how you can spend the money.
Eligibility: A credit card loan can be availed against the credit card limit of your credit card. Only select customers are eligible for a loan against the credit card, which could make it inconvenient if you are in urgent need of funds. The card limit is blocked, which is subsequently released as you pay back the EMIs.
Loan amount: The loan amount depends entirely on the limit available on your credit card, and your issuer's lending policies. For instance, if you are in urgent need for Rs. 1,50,000 and your credit card limit is only Rs. 1,00,000, your application would be rejected, or you would be offered a lower amount. You can log in to your bank's Net Banking platform and check your eligibility for such loans.
Interest rate and tenure: You need to check with your bank on the interest rate on a loan against your credit card. The loan is paid back in EMIs, just as with a personal loan, but you will not be able to use your card fully until the entire amount along with interest is paid back to the bank.
So, which is better? A personal loan is a good option if you are in need of a large loan amount to cover medical expenses or to consolidate your debt obligations.
However, if you just need a smaller amount (say to buy a gadget) and don't mind your credit limit being blocked temporarily, then a credit card loan might be a more convenient choice. It could also become an option if your bank rejects your personal loan application.
However, keep in mind the comparative interest rates and repayment conditions between a personal loan and credit card loan, before you make a final decision.
A personal loan also helps you determine an EMI that is best suitable for you over a period of time and one that does not affect your financial position. Credit card interest rates are so high that it becomes a real challenge to pay even their minimum amount due. One also has to remember that paying the minimum outstanding every month will mean you take years to settle your credit card debt.
A personal loan is an unsecured loan like a credit card debt, but allows an individual to make some choices. You have the option to shop around and get the best interest rate possible. You also have a choice when it comes to fixing the tenure of the loan and other terms and conditions. Having a choice along with a lower interest rate allows you to get a better grip of your debt and increases the potential to reduce it.
On the potential impact on your credit rating, the impact is limited because credit card outstanding is also reflected in your credit scores and replacing that debt with a personal loan merely amounts to transferring one type of unsecured loan with another. Credit card outstanding, however, involves revolving debt, which means you have not paid your outstanding and the same is carried forward next month with interest, and this is more harmful and difficult to pay when compared to installment debt that comes with a personal loan.
This gains importance as according to the Reserve Bank of India, the average loan per credit card in India in April 2015 stood at Rs 14, 764, which translated to a 52% increase from Rs 9, 700 in April 2011. On the other hand the total outstanding amount on credit cards as of 31 March, 2015 was at Rs 30,500 crore, compared to the total amount spent on credit cards during the year which was at over Rs 1,90,000 crore. At about 16 %, this ratio is far less compared to western countries, but something that needs to be watched closely.
Converting your credit card debt to personal loan also frees up the balance of the card, but care must be exercised that you do not use the available balance indiscriminately and run up further debt. This will put you in a very tricky place and put you in a lot of financial hardship. Live within your means and pay off the personal loan that was used to settle the credit card debt.
In a nutshell, if you think you can pay your outstanding credit card debt soon, getting a personal loan may not be worth it. On the other hand, if you think your debt is unmanageable, spreads across one or more cards, it is better to opt for a personal loan. Personal loan allows you to consolidate different debt, easy to understand, easy to comply with and most importantly has a much lower interest rate compared to a credit card.
Better grip of finances:
A personal loan is an unsecured loan like a credit card debt, but allows an individual to make some choices. You have the option to shop around and get the best interest rate possible. You also have a choice when it comes to fixing the tenure of the loan and other terms and conditions. Having a choice along with a lower interest rate allows you to get a better grip of your debt and increases the potential to reduce it.
On the potential impact on your credit rating, the impact is limited because credit card outstanding is also reflected in your credit scores and replacing that debt with a personal loan merely amounts to transferring one type of unsecured loan with another. Credit card outstanding, however, involves revolving debt, which means you have not paid your outstanding and the same is carried forward next month with interest, and this is more harmful and difficult to pay when compared to installment debt that comes with a personal loan.
This gains importance as according to the Reserve Bank of India, the average loan per credit card in India in April 2015 stood at Rs 14, 764, which translated to a 52% increase from Rs 9, 700 in April 2011. On the other hand the total outstanding amount on credit cards as of 31 March, 2015 was at Rs 30,500 crore, compared to the total amount spent on credit cards during the year which was at over Rs 1,90,000 crore. At about 16 %, this ratio is far less compared to western countries, but something that needs to be watched closely.
Converting your credit card debt to personal loan also frees up the balance of the card, but care must be exercised that you do not use the available balance indiscriminately and run up further debt. This will put you in a very tricky place and put you in a lot of financial hardship. Live within your means and pay off the personal loan that was used to settle the credit card debt.
In a nutshell, if you think you can pay your outstanding credit card debt soon, getting a personal loan may not be worth it. On the other hand, if you think your debt is unmanageable, spreads across one or more cards, it is better to opt for a personal loan. Personal loan allows you to consolidate different debt, easy to understand, easy to comply with and most importantly has a much lower interest rate compared to a credit card.
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