Personal loan or loan against credit card —which is better for you?  |  Photo Credit: Thinkstock
Desperate times call for desperate measures goes the adage and at a time when the ongoing public health catastrophe is one such scenario. It has drained the finances especially those who are faced with crushing hospital bills.
Personal loans and loan against credit card are some of the quickest methods to raise money for pressing needs such as healthcare costs. Both are quite similar as they are unsecured which means no collateral is required and come with a fixed rate of interest and no conditions on usage of the sanctioned amount.
Interest rate: While a loan against credit card is not advisable given the high-interest cost, here’s how it is different from personal loans. For personal loan, the interest rate is usually between 10-24% per annum and is usually decided on factors such as credit profile, payment history, job profile of the applicant, employer profile etc.
Eligibility: Several factors relating to the loan applicant’s credit profile are taken into account when lenders evaluate a loan application. These include the applicant’s monthly income, credit score, other loan obligations, job stability and employer profile in case of a personal loan. Personal loans are disbursed to existing and new customers based on certain conditions.
A loan against credit card, however, is pre-approved debt issued by credit card issuers to their customers based on factors such as card type, spending habit, credit limit, and bill repayment history.
Loan amount: The amount for personal loans generally ranges from Rs 50,000 to Rs 25,000 but some banks and NBFCs disburse up to Rs 40 lakh. The sanctioned amount depends on the loan applicant’s credit history and profile.
For credit card, this amount ranges to a maximum limit of credit card and is generally pre-determined for every customer. When a loan against credit card is issued, the credit limit up to the loan amount is blocked and it is subsequently freed as it is paid back. Some credit card issuers even offer loan amount higher than credit limit to select users.
Time taken to process loan: Personal loan applicants are required to submit documents such as payslips, ITR form, and other loan approval documents. It takes about 2-7 days for disbursal of personal loans if the application, if accepted. Some lenders may approve the loan amount quicker in case of pre-approved loans.
Credit card loans are pre-approved and are usually the amount is disbursed on the same day of loan application in a matter of hours.
Processing charge: For a personal loan, processing charges can be as much as 3% while it is 2-2.5% in case of loan against credit card. This processing fee can have a significant impact on the overall cost of the loan and therefore must be compared before making a call.
How to choose between two: Loan against credit card is better suited for those who immediately require funds and can repay the same within a short duration. Personal loans are more suited for those looking for larger loan amounts and have the capacity to pay it off over a longer tenure. The lower interest rate of personal loans will help the borrower reduce the overall interest cost.
Before choosing between the two compare the features of the loan being offered.