Personal loan or credit card? Choose the best option for emergencies


Although both have quick disbursements, their different characteristics may make them more suitable for different borrowers.

Taking out personal loans and using credit cards are usually the first two options that come to mind when faced with shortages of funds or financial demands. Although both of these options have quick disbursements, their different product characteristics may make them a more suitable option for different groups of borrowers.

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

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

The financing of your expenses by credit card is interest free as long as the entire invoice is repaid by the due date. Failure to repay full contributions on time would result in high financial charges of 23-49% per year. also hurt your credit score.

In the event that the cardholder converts their unpaid contributions to EMI or avails themselves of a loan against a credit card to finance their purchases, their interest charges would generally be higher than the interest rate of the personal loan which they are paying for. has with the same card issuer.

Amount of the loan: Lenders generally sanction a personal loan amount ranging from Rs 50,000 to Rs 25 lakh depending on the repayment capacity of the loan seeker. Some banks and NBFC also claim to sanction a larger loan amount of up to Rs 40 lakh.

In the case of credit cards, card issuers set credit limits for credit card holders based on their monthly income and credit repayment history. Credit card holders can swipe the card or take out a loan against credit card up to the authorized credit limit. While the credit limit is reduced by the amount spent through the credit card or by the amount of the loan used as a credit card loan, it is gradually released as the cardholder repays the contributions from the credit card. credit card.

Some credit card issuers also offer a credit card loan variant in which the loan amount offered is greater than and greater than the cardholder’s credit limit. As the loan amount in this case has no impact on the card’s credit limit, the cardholder can continue to make their usual expenses from their sanctioned credit limit.

Processing time : Personal loan applicants are generally required to submit their pay stubs / RTI forms and other documents for loan processing and approval. Since the process of verifying these documents can take some time, personal loan disbursements can take up to 2-7 days. That said, some lenders claim much faster disbursement of personal loans, especially in the case of pre-approved personal loans offered to selected clients.

Access to credit through credit cards is usually instantaneous for actions such as swiping at the point of sale or making online transactions. In the case of EMI conversion and credit card loans, requests are usually processed on the same day as the request is made.

Repayment period: Personal loan repayment terms generally vary between 1 and 5 years, with some lenders offering a minimum term of 6 months and a maximum term of up to 6 to 7 years. While a credit card holder can continue to pay their dues for as long as they want, it is not advisable to do so as it can result in high finance charges. In case of credit card loan and EMI credit card conversions, the tenure period typically ranges from 6 months to 5 years.

Processing fee: The processing fees for personal loans are generally up to 3 percent of the loan amount. However, some lenders waive processing fees for special offers and / or for selecting consumers. In the case of credit card transactions, card issuers do not charge any processing fees. However, card issuers may charge a processing fee on the use of a loan against a credit card or an EMI conversion facility.

Penalty for early repayment: Lenders offering personal loans with variable interest rates are not allowed to charge prepayment penalties. However, those who offer fixed interest rate personal loans charge a prepayment penalty of around 2-5% of the outstanding balance or prepaid loan amount. Additionally, some lenders allow personal loan borrowers to make prepayments only after a predetermined number of EMIs have been repaid.

In the case of credit cards, card issuers typically charge a prepayment penalty of about 3 percent of the loan amount against credit card and EMI conversions.

Choosing between a credit card and a personal loan

Opt for the available credit card financing options if the loan amount required is relatively smaller and / or the need for disbursement is too urgent to wait 2 days or more. Otherwise, go for personal loans as their interest charges would most likely be lower than those available through credit card loans or EMI conversions. Also, check online financial marketplaces to find the best personal loan deals available to you based on your credit rating, monthly income, and other aspects of your credit profile.

The author is Senior Director,

DISCLAIMER: Opinions expressed are those of the author and Outlook Money does not necessarily endorse them. Outlook Money will not be liable for any damages caused to any person / organization directly or indirectly.

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