Credit card loan or personal loan? Which one you should choose, if at all

Keeping credit cards is not a big deal anymore. What is an interesting trend, however, is the fact that an increasing number of credit card companies and banks are now offering personal loans. 

A typical personal loan offer on a credit card states that the loan will be over and above your credit limit and will not block money from your already sanctioned limit. 

The ease of getting this loan is attracting people to apply for these personal loans on credit cards. 

Unlike a personal loan, the documentation is minimum as credit card companies already know you credit profile. 

So what is a credit card loan? 

A credit card loan is a pre-approved loan where your bank lends you up to a certain percentage of your underutilized credit card limit. Some banks may offer loans exceeding this limit as well. A credit card loan is not the same as cash withdrawal using credit cards.

In simple language, cardholders can avail pre-approved loans on credit cards within or over their credit limit. Similar to the usual loan schemes, the issuer essentially loans you the amount which you will be able to repay at a later date while being charged a definite interest rate.

The interest charged on loan on credit card is similar to or a few notches higher than that of a personal loan while interest on cash withdrawals tend to be much higher. The limit on cash withdrawal could be much lower than that of the eligible loan amount on the credit card.

The quantum of loan on credit card usually depends on the credit limit. Some issuers also offer loan over and above the credit limit where the availed loan amount will not be blocked against the credit limit. Also, starting from a minimum purchase amount of Rs. 2000, you will be able to convert your purchases to loan and pay it as EMIs.

How is it different from personal loan?

Navin Chandani, Chief Business Development Officer, BankBazaar said, "It is similar to personal loans, however, unlike personal loans, the credit card loans are already pre-approved and rarely entail additional paperwork."

A customer will receive the sanctioned loan amount either as a demand draft from the bank or a direct transfer to their bank account.

What's the deal? 

As a pure unsecured loan, the interest rate would be higher than personal loans. "Also, the rate of interest will be dependent on the type of card and the credit profile of the customer," Chandani said. 

According to a report by IIFL, Personal loans are usually available at an interest rate of 13-22%, while credit card loans are offered at 10-18%. Credit card loans are usually offered at flat interest rates, while personal loans are offered at reducing balance rates.

Also, one can get small loans through Credit cards, while to get a large amount of loan, personal finance loan may be a better option since credit card limits are usually limited.

Should you take it?

The short answer is, no. However, if there is an unavoidable need and you must take a personal loan on a credit card, do find out the rate of interest charged on the loan against the credit card from your credit card issuer, and then compare the same against the interest charged on personal loans. 

Remember that your cash withdrawal facility on the card will be restricted once you opt for a credit card loan. Also, your credit card limit may be curtailed to the extent of the outstanding loan amount.

One of the disadvantage of credit card loan, is that you will be charged a certain amount as processing fee. Also, you might be levied a pre-payment penalty if you decide to foreclose the loan.

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