What You Must Know before Applying for a Personal Loan and Credit Card Loan

At some point or the other in most people’s lives, there arises a need or possibly an emergency where money needs to be borrowed on an immediate basis. However, to be realistic, not every one of us is flushed with reserves of cash or assets which can be liquidated with ease. Moreover, there are several types of unexpected emergencies which can unexpectedly pop-up without any caution.

The unforeseen circumstances can put even the best of us off-guard, especially in situations where you’re least expecting it. In that light, seeking financial aid from your family or friends during these trying times can prove to be tricky. There’s a likelihood that no one will empathize with your current financial predicament or your plea might eventually end up falling on deaf ears leaving you stranded just waiting for a response from their end. 

This is where loans come to your rescue as they can help bail you out during these difficult times of need by injecting you with an instant source of funds. The good news is that applying for a loan and getting approved is no longer a daunting task as there are several types of loan options to choose from.

Further, each loan you seek is structured as per your requirement – choose between Educational Loans and Personal Loans to a Home Loan and a Credit Card loan. Keeping that in mind, any current financial needs you might have– including house-renovations, car maintenance expenses or repairs, unexpected medical expenses, a long-awaited dream vacation, wedding-related expenses, debt consolidation, academic pursuits or funding your child’s education, or for that matter, even purchasing the latest gadget you covet, all can be taken care off almost immediately.

Undoubtedly, one of the best features of availing such loans is that they provide you with the flexibility to use the funds as and how you want– no questions asked! Thus, these types of loans prove to be a convenient and great way to funding any big-ticket purchases, that otherwise would have been difficult or challenging to pay off with just a regular salary.

That said, while Personal Loans are a great way for meeting big financial obligations and for funding big-ticket purchases, Credit Card loans are usually recommended only for fulfilling short-term monetary requirements which can be paid off in a month or two. To understand these two instruments better, let’s dive right in and highlight the various features of these products and thereon, compare them further so that you will have a clearer understanding as to which instrument matches your requirements better. 

Personal Loans:

Personal Loans are categorized under unsecured loans that can help in meeting your current financial needs or help out during financial emergencies. Personal loans are usually short-term in nature but can range from anywhere between 12 to 60 months. Additionally, Personal Loans usually have a fixed term along with a fixed interest rate. Being an unsecured loan, the interest rate chargeable on Personal Loans tends to be a bit on the higher side.

In most cases, these kinds of loans are issued without the need for pledging any security or collateral and without needing to nominate a guarantor or deal with any cumbersome paperwork. To that end, to highlight the swiftness, several financial institutions including HDFC are known to disburse HDFC Personal Loans within just a matter of minutes on receiving an application. 

Credit Card Loan

Credit Card Loans are pre-approved, unsecured loans that entail the need for zero documentation. Not only it is regarded as one of the fastest sources to attain credit owing to the lack of lengthy over-drawn procedures but it also doesn’t require you to put up any collateral to avail a loan on your Credit Card. 

Moreover, you can repay these loans either by way of simple EMIs or by instead opting to get it deducted from your monthly Credit Card limit. You have the option to choose to pay in a term spread over 12, 24, or 36 months and in some cards such as HDFC Credit Cards, even a term up to 48 months is made available.

Credit Card Advance Vs Personal Loan

So which is the right choice for you? While both these loans come with their own set of pros and cons, you should pick one depending on your specific requirement and after taking into consideration your repayment capability.

Documentation & Disbursement:
A Personal Loan vis-à-vis a Credit Card Loan requires more documentation for approval. These can include your ITR returns, identity proof, address proof etc. In comparison, loan on Credit Card doesn’t require any documentation and is faster to attain. The disbursement process is also slightly longer on a Personal Loan as compared to a Credit Card loan which is why Credit Card loans are better suited for situations where cash is needed almost immediately. 

Moreover, while both these loans are unsecured without the need for furnishing collateral, acquiring a Personal Loan is a bit trickier. More often than not, the lending institution only releases the loan amount after conducting a thorough background check on your financial capability. The lender will also assess factors such as your credit score, credit history, monthly income etc. 

Interest: One of the key aspects to look out for at the time of applying for a loan are the interest rates on offer. More often than not, Personal Loan interest rates tend to be on the higher side and are offered anywhere between 12-22 percent per annum. The interest rate is dependent on your credit history.

On the other hand, Credit Card Loan can cost you 2-3% per month. The USP of credit card loan is the free credit period which can make you loan free of interest in case you repay before the generation of card statement. Another key distinguishing element is that Personal Loans are available with reducing balance rates while Credit Card loans can be availed at only flat interest rates. 

Tenure: In case of a Personal Loan, the repayment periods are usually longer and range between 12 to 60 months. Credit Card Loans, on the other hand, can be taken for lower tenure periods ranging from anywhere between 6 months to a maximum of 48 months thus allowing you sufficient time and flexibility to repay your debt.

Amount of Loan: The type of loan you choose is entirely dependent on your financial requirements. A Personal Loan is said to be an ideal when large sums of money are sought while a Credit Card loan is a suitable option when you’re in need of only a small amount. The loan amount you qualify for in case of a Personal Loan is determined after considering factors such as your credit profile, employment status, repayment capability, etc.

It needs to be pointed out that in case of a Credit Card loan, the amount you’re eligible for is dependent entirely upon your Credit Card limit. There’s also a likelihood that your loan application might get rejected if you’ve applied for a loan which exceeds your card limit. Moreover, your credit limit will also be blocked temporarily to the extent of the loan sought by you. 

The Bottom Line 

If you’re wondering which one is better – Personal Loan or Credit Card, then there’s no single point answer. Simply put, you need to choose between the two based on your financial needs– how long you need the loan for and how quickly you need it. While a credit Card loan can prove to be more affordable, a Personal Loan can allow you to avail a higher amount. 
The decision depends upon your circumstances, and after figuring out which instrument you feel is best suited to your current needs. Ensure you compare both instruments in-depth while also weighing in your financial obligation before taking the final call.