Credit Card vs a Personal Loan

Whether you face daily shortfalls or unexpected emergencies, funds are constantly needed. The good news is that banks and NBFCs offer various credit options, allowing you to choose what suits you best.

There’s a solution for every need, from secured credit options like mortgages, auto loans, or gold loans to unsecured possibilities like Credit Cards or Personal Loans for smaller amounts. This flexibility empowers salaried individuals with a regular income, allowing them to tailor their borrowing to their specific circumstances.

How Does a Credit Card Loan Work?

A Credit Card is a handy credit tool that allows for easy spending. Most lenders sanction a credit-free period of 30 to 50 days to pay the monthly bill amount. If you cannot pay the total amount due, a minimum of 5% must be paid.

To facilitate the payment, the customer has a choice of converting the balance into a consolidated amount or as a Loan, which is payable in monthly instalments. Alternatively, a loan on behalf of a Credit Card is also offered to cardholders seeking funds for other personal usage and emergency needs.

When you take out a Credit Card Loan, the issuer provides the funds to be repaid with interest in equated instalments that form part of the monthly statement to be cleared on the due date for the tenure applied.

What are the Features of a Credit Card Loan?

A loan against a Credit Card is available to a holder because there are no defaults in the payment history and enough balance on the card to support the loan. For example, an ICICI Bank coral credit card holder with a limit of ₹ 200000/—can borrow ₹160000/—if ₹ 20k has already been spent on the card, then the amount is ₹140000/—The card can only be used for the limit balance until the monthly EMI gets paid.

The monthly instalment for the loan appended forms part of the monthly statement presented to the customer and must be paid on time.

Benefits: Credit card payments are made immediately upon purchase of the item, and the holder can simultaneously request that the amount be converted into a loan. Funds can also be received in the account on request as a Personal Loan for shortfalls or emergency needs.

Thus, the customer has immediate access to funds with no paperwork, and since the credentials have been verified previously, the Lender can request funds on the go.

The interest rate applicable to a Credit Card Loan is reasonable, and the loan amount can be repaid anytime.

Precautions: Although the Loan Against a Credit Card seems like a perfect deal, there are underlying precautions and restrictions to be noted.

The Loan amount will depend on the current limit of the credit card if the threshold is crossed, penalties will be levied.
The credit card cannot be used for further spending till the instalment is repaid and the limit is released.
An interest charge of 36% per annum applies to an unpaid instalment, so it is a priority to repay the bill as per the due date reflected on the statement.
The interest for a late payment is in addition to the interest charged for the loan amount borrowed.

How Does a Personal Loan Work?

A Personal Loan has become the most popular credit tool today when funds are required for individual needs. Banks are keen to lend funds for a short term, which can be used as needed and repaid with fixed monthly Installments.

HDFC Bank, ICICI Bank, AXIS Bank and YES Bank Service Personal Loans to account and non-account holders for loan amounts of up to ₹ 30 lakhs for 12 to 72 months. The personal loan policy for most Banks is similar, with each lender having specialised norms and target segments.

To initiate the process, the applicant must submit the requisite income and KYC Documents with online processing, applications are expedited, and funds are disbursed within 48 to 72 hours.

What are the Benefits of a Personal Loan

An applicant can borrow funds as a Personal Loan per the requirements and eligibility. The approved loan amount is credited to the account once and can be used as desired.
The interest rate for a Personal Loan is reasonable, starting at 10.75%. The interest is applied monthly, reducing the balance.
The Repayment for a Personal Loan is via equated instalments deducted from the account on a fixed date.
The customer can repay the loan over a suitable tenure with an affordable EMI. The terms are fixed at the time of disbursal and are not affected by market fluctuations.

Restrictions:

To Apply for a Personal Loan, the applicant’s employer must be on the Bank’s Approved List of Companies.
The applicant’s CIBIL Score is accessed when Applying for a Personal Loan. The score should be above the required benchmark.
The customer’s credit history must be free of aberrations, and any previous relationship must be successful and managed successfully.
The bank requires complete documentation to Process a Personal Loan. If any document is incomplete, the process is put on hold.
The minimum lock-in period for a Personal Loan is 12 months. If a loan holder has surplus funds to close the loan, a payment of 12 EMI is mandatory before closure.

In Conclusion

A loan on behalf of a credit card is credited to the account directly without any questions, which works well in emergencies. However, the amount cannot exceed the card’s prescribed limit.

Timely repayment of the instalment is paramount, as delays can lead to further costs. With the excessive interest charged, there is the danger of getting into a debt cycle. Factually, with a credit card, the lender is giving you funds to return the original amount and will charge you interest on the same!

The terms and conditions of a Personal Loan are structured, and the interest charged is reasonable. To be Eligible for a Personal Loan, the applicant must have a good repayment track record of credit taken. If excess dues are to be paid as a balance on your card, taking a Personal Loan to repay the same is a good idea!

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