In a situation when an individual needs money quickly to a financial emergency, it can be due to a medical emergency, unexpected travel, or a home repair, in such a case getting money fast is of utmost importance. Most people turn to personal loans or credit card loans as the two main ways to handle such expenses. Though both are short-term financial support, they are different in their structures, flexibility, and cost. However, the choice of the suitable one will depend on the urgency, repayment ability, and the needed amount.
It is very important to know the main differences between these two to be able to make a better choice after you have limited time and need a clear understanding.
What is a Personal Loan?
A personal loan is a debt without collateral by which you get a certain amount and pay it back within the agreed period by means of EMIs. Generally, it is a fixed interest rate, with a processing fee and a structured repayment plan that ranges from 12 to 60 months. Since it is unsecured, the lenders look at your credit score, income, and repayment history to decide whether to approve the loan.
Mostly, a personal loan is used to finance costly events or treatments (weddings, medical treatments) or to alleviate indebtedness. Prediction and a fixed repayment plan are the most suitable for planning the budget.
What is a Credit Card Loan?
A credit card loan can be defined as money you borrow against the card’s credit limit. It may be either an EMI loan or a cash advance in this case. A part of the credit card loan may be pre-approved for eligible customers and they can use it immediately, or else, the process of making a request and obtaining permission is necessary. The interest rate may be different for each loan and the card issuer.
Though a cash advance is easier to get, it usually incurs a higher interest rate and some hidden charges. However, EMI-based card loans are expected to have many of the favorable features of the loan but still are known to have rates higher than personal loans.
Loan Amount and Flexibility
Usually, a personal loan lets you borrow a bigger sum than a credit card loan. Based on your individual profile, you can get amounts starting at ₹50,000 and going up to ₹25 lakhs and even more. By having a fixed EMI, it becomes easier for you to organize your repayment plan.
On the other hand, with a credit card loan, you can only borrow within the credit limit that is available on your card. If your limit is ₹1,50,000 and you have utilized ₹50,000, you can borrow a maximum of ₹1,00,000 — only if the issuer allows. For times when small and quick expenses pop out, it might be enough. However, in case the need is large, a personal loan will be better.
Interest Rates and Charges
Among the deciding criteria when selecting between the two, interest rates occupy a prominent place. Typically, personal loan interest rates are 10% to 18% annually and depend on your credit score, employer category, and the relationship you have with the lender.
Prices charged for card loans, in particular for cash advances, are usually much higher — even 30% or more throughout the year. Nevertheless, using the card in installments will not significantly change the situation, as the interest rate on card loans may be higher than for personal loans. Also, cash advances may begin interest charges from the very first day of use and possibly be without an interest-free period.
A personal loan app could only give special rates or charge low processing fees, in particular, for good credit profiles and thus, a less expensive option that can be debt free for a longer period of time.
Repayment Terms
Personal loans are a very good option for people who want to have a structured repayment plan over a fixed tenure, generally from 1 to 5 years. Therefore, this certainly helps in budgeting, especially when it comes to a big loan.
Credit card loans are usually of shorter durations. The EMI repayment plan might be used for no more than 24 months, whereas the repayment of the cash advance is anticipated to be accomplished quickly so that no high-interest rates are incurred. Also, your monthly credit card statement includes the amount of your EMI and your ongoing spends, which could make managing repayments a little complicated.
Eligibility and Approval
Loans for personal use are approved based on various factors such as the source of income, employer profile, and credit score. If your credit score is more than 700 and your income is stable, then it is easy that you will get the loan quickly. A personal loan app may make this process more convenient by enabling you to check eligibility instantly without visiting a branch physically.
If you already have an active card with a payment history that is good, you can easily access credit card loans. But still, they might not be available to new customers or those who have only a little credit history.
Impact on Credit Score
Both personal loans and credit card loans are the sources that have an impact on your credit report. Making payment on time will create a good score, but if you miss a payment, then your score will be reduced. On the other hand, a credit card loan increases your credit utilisation ratio massively — which could lead to a downfall of your score, though only temporarily.
In contrast, a personal loan also enhances one’s credit mix but does not result in increased utilisation. On the other hand, if you maintain a regular repayment schedule, it can lead to a rise in your credit score in the long run.
Role of a Personal loan App in Emergencies
In critical cases, it can also be said that a personal loan app can act as an enabler of a smooth journey — like verifying the eligibility and also having the money directly deposited in your bank account. Although a credit card swipe is the quickest, a personal loan app, nevertheless, is the mid-way connecting accessibility with affordability, in particular, for the clean credit borrowers.
Some people find that the use of a personal loan app is the most convenient way of browsing through multiple providers at a glance, comparing interest rates, and deciding upon the repayment period which is most compatible with their monthly budget. These individuals find such platforms very appealing as there is very little documentation and the payout is hence rapid. Those who are either salaried or self-employed typically make use of such platforms to their advantage.
Conclusion
Since personal loans and credit card loans are tailored to meet different types of needs, the one which would be more suitable depends on factors such as your urgency level, ability to make repayments, and the sum required. A personal loan is usually the most affordable choice if all of the three i.e. a large sum, structured repayment, and lower interest rates are your requirements. In contrast, if you only need a small amount quickly and can pay it off soon, a credit card loan can be a good alternative.
You can opt for either a traditional lender or a personal loan app but the most important thing is that you should thoroughly understand the conditions, check the fine print, and reevaluate your current financial condition before borrowing. Taking the right decision assures that you will be able to get the required funds without incurring the unexpected financial stress later on.