Are Credit Card Loans Better Than Personal Loans?

Most people take out their savings when in need of additional funds. However, when savings are not enough to help you, you can take other financial routes. Two of these are personal loans and credit card loans.

Personal loans and credit card loans are similar yet different. Both differ in several key parameters like interest rate, repayment schedule, and so on. 

Let’s explore the differences between the two loan options to answer the question of which one is better.

How Does A Credit Card Loan Work?

Credit cards are something that everyone uses to pay for items online or offline quickly. Many credit card companies are now offering credit card loans as an instant funding option. It is one of the quickest ways to acquire additional funds, ideal when you need it urgently. 

The reason why the process is so quick is that credit card loans act as pre-approved loans. Instead of formally applying for a loan, the company lets you utilise the credit limit on your card. So there is no documentation required – you get your money hassle-free! 

Since it relates to the pre-set limit, the amount you borrow in this loan depends on your available credit. The loan amount is given to you in the form of a demand draft or, more likely, as a direct bank transfer.

For the repayment, you do monthly instalments either by paying off the minimum due or full balance. 

Keep in mind the more you repay, the less interest you will pay on the remaining balance.

Pros

• Some credit card loans offer a 0% interest period. 
• Instant money whenever you need it. 
• You can take a credit card loan for a small tenure.
• Flexible repayment schedule and borrowing based on the credit limit. 
• A quick way to get a loan without going to a bank. 

Cons

• Only those with a strong credit score are eligible for these loans. 
• Credit card loans come with annual fees, over-the-limit fees, and late payment fees. 
• It will increase your credit utilisation ratio, which negatively impacts the credit score.

How Does A Personal Loan Work?

The main difference between a personal loan and a credit card loan is the balance and loan application process. Personal loans do not offer an ongoing loan amount as credit cards do. Instead, you get a lump sum upfront! You get to set the amount to fit your exact financial need. 

You will submit certain verification documents as the lump sum is usually large. Once everything is in order, the loan gets transferred to your account. Later on, you make the repayments according to a pre-defined EMI plan over a period of time. 

Personal loans offer a larger amount than credit cards. So you can use them for a range of different purposes like medical bills and buying a home or a new car. 

Pros

• Personal loans are ideal for big-ticket purchases like homes and cars. 
• You can get a personal loan even if you have a bad credit score. 
• Personal loans often come with lower interest rates than credit card loans.
• It provides a larger amount of money in a lump sum as there is no credit limit.

Cons

• Loan approval can take days as the financial provider has to analyse all the additional documentation. 
• Processing fees may increase the interest rate. 
• Personal loans typically come with a fixed payment schedule. 
• You will need to provide collateral for secured personal loans. 

Should You Get A Credit Card Loan Instead Of A Personal Loan?

Both come with their fair share of risks and benefits. So the decision comes down to what you need the loan for and your credit score. 

With credit card loans, your borrowing amount is restricted by your credit card spending habits and credit score. So it works better for people who need to make a relatively small business or personal purchase. Personal loans give a higher loan amount and therefore suitable for various big purchases.

Many borrowers find it more appealing to get a credit card loan since it’s quick and includes an interest-free credit period. However, this loan also negatively impacts your credit score. 

Since you are utilising the credit limit here, the credit utilisation ratio goes up. This high credit balance lowers your credit score accordingly. 

Unlike credit card loans, personal loans can improve your credit score when you repay them on time.  A good mix of personal loans also diversifies your accounts and gives you a healthy credit score. 

FAQs

What are the eligibility criteria for credit card loans and personal loans?

For credit card loans – 

• Strong credit history
• Reliable repayment history on credit card bills

Personal loan requirements will vary according to the purpose (home, education, and so on). Some general requirements are –

• Residential proof
• Age proof
• Income receipts
• Good credit rating

Final Thoughts

The answer to the question “are credit card loans better than personal loans?” is – it depends. Personal loans are less risky for those who want big bucks and sufficient time to pay them off. However, credit card loans would be the right choice if you want a short-term debt for an urgent situation.