Personal Loan vs Credit Card Loan: Which Is Cheaper for Emergency Funds?
Emergency cash requirements come unexpectedly, and when they do, there are two options: a personal loan or a credit card loan.
A personal loan is usually cheaper for amounts above ₹50,000 or for repayment terms beyond 3 months, due to lower interest rates and fixed EMIs. A credit card loan works better for small amounts you can repay within your next billing cycle.
Below is the full comparison of personal loan vs credit card to understand which is the cheaper option for different emergency situations.
What is a Personal Loan and Credit Card Loan?
A personal loan is issued by banks, online lenders or credit unions at an interest rate specific to the issuing lender. It is repaid in instalments spread over a period. A personal loan is issued to individuals who meet the lender’s eligibility criteria. It allows foreclosure and pre-payment of the loan to reduce the burden on the borrower.
A credit card loan offers the credit limit as the maximum loan amount. It is issued on your credit card, and the interest on this loan is lower than the credit card interest rates. The loan is provided either through a demand draft or is directly credited into the account.
Both are unsecured loans that do not require any collateral.
Personal Loan vs Credit Card Loan: Comparative Features
Here you will understand how you can select between a personal loan and credit card loan by considering the different factors:
Disbursal Amount
A personal loan offers a comparatively higher amount, with the limit set upto multiple lakhs by lenders. This helps meet larger expenses.
The disbursal amount on a credit card is limited to the card’s unused credit limit. Hence, the value majorly depends on the existing credit card limit.
Interest Rates and Charges
Personal loans have fixed interest rates, which ease financial management by providing a predictable EMI throughout the tenure (though floating rates are also available). Also, interest rates are lower on personal loans than on credit card loans.
While processing fees apply to both personal and credit card loans, these loans also include additional charges. Personal loans include stamp duty, prepayment, foreclosure and multiple other charges.
Credit card loans have lower interest rates compared to standard revolving credit card rates. Moreover, credit card interest rates are variable, which makes financial planning challenging, especially when hefty amounts are borrowed.
Note: Credit card loan interest rates generally vary from 12% to 29% per annum, while those of personal loans are generally 10.50% onwards. This makes personal loans cheaper in the scenario of hefty amount requirements, as the repayment would be spread over a specific period.
| Estimate Your Borrowing Cost
Before applying, use a personal loan EMI calculator to estimate your monthly EMI and total interest payable. Comparing this with the repayment cost of a credit card loan gives a clearer picture of which option is cheaper. |
Disbursal Time
Personal loans are disbursed quickly; many lenders now offer instant personal loans with disbursal in a few minutes for pre-approved borrowers. Non-pre-approved applications may take a few working days depending on the lender’s verification process and workflow. It may take a few minutes to a few working days.
Credit card loans offer quick disbursal, since they are based on the existing credit card limit.
Documentation Requirements
Personal loans require detailed documentation, where common documents include:
- KYC documents
- Proof of income
- Bank statements
Credit card loans, being based on the existing credit card limit, are pre-qualified or pre-approved. Hence, minimal documentation, such as a credit card number and a registered mobile number, would be more likely.
When to Choose Which: Personal Loan vs Credit Card Loan?
The choice between the two will depend on your specific situation. Here is a simple guide to help you decide:
Choose a Personal Loan If:
- You need a larger loan amount
- You require a longer repayment tenure
- You want a lower personal loan interest rate for predictable payments
- You are funding major emergencies, such as medical treatment, education or home repairs
- You want fixed EMIs for easier budgeting
- You do not want your available credit card limit to reduce
- You prefer a single loan rather than multiple credit card limits
- You qualify for an instant personal loan from a lender and need funds within minutes
- Example situations include:
- Vehicle breakdown or urgent travel
- Urgent home repair after damage
- Rent deposit
- Sudden hospitalisation
- Surgery
- Major appliance replacement
Choose a Credit Card Loan If:
- You need a relatively small amount
- You can repay the loan within a short period (less than three months)
- You already have a pre-approved loan offer on your credit card
- You need funds immediately for an urgent short-term exposure
Overall, a personal loan is better suited to larger emergency expenses and longer repayment periods. A credit card loan is better suited to smaller and short-term funding needs.
Conclusion
There is no one-size-fits-all answer when comparing a personal loan vs credit card loan. The right choice depends on the required amount, repayment capacity and the total cost of borrowing. Check credit card loan and personal loan interest rates, eligibility and other important factors before finalising.
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