Personal loans and credit cards are unsecured forms of credit. Banks and non-banking financial institutions offer both. These credits are offered at specific interest rates, repaid in EMIs, involve penalties for default and have specific charges and fees. Mismanagement of the two can affect one’s credit profile and financial stability.
Here is a comparison of personal loans and credit cards:
|Parameter||Personal Loan||Credit Card|
|Documentation||To avail personal loans, individuals need to submit several documents like income statements, bank statements, and ITR returns.||Individuals have to submit only a few basic documents to get a credit card. Moreover, in many cases, financial institutions provide pre-approved credit cards to select customers. Therefore, the processing time is also faster in case of credit cards.|
|Interest||Interests are on the higher side. It varies between 10-22% and is set according to the applicant’s profile.||Interests on monthly payments are low, between 2-4%. However, APR or the interest charged on default is very high and can touch even 45%.
For credit cards, interest is usually calculated as a flat rate. This means that the interest amount is the same for every EMI irrespective of the principal amount.
|Tenure||The repayment tenure of personal loans is longer. It generally varies between 1-5 years for most of the lenders.||They have shorter repayment tenures. It is generally taken to buy products or meet short term emergencies.|
|Loan amount||The loan amount in the case of personal loans can be quite high. It is dependent on one’s credit history and income profile.||One can spend using credit cards according to the pre-determined credit limit only.
For example, let’s say that one has a credit limit of Rs. 50,000. He/she can only spend only up to that amount. If the individual spends Rs. 35,000, then the available limit will be Rs. 15,000 only.
|Funds disbursement||Funds are provided in a lump sum manner. The lender directly transfers the funds to a borrower’s account.||Funds are directly provided to the merchant or seller. Customers do not receive funds in their bank account.|
|Charges||Banks levy different fees like processing fees, late fees, etc.||Credit cards involve more fees and charges, for example, APR, annual charges, foreign exchange fee, cash withdrawal charges, etc. Out of these, APR is very high.|
Personal loans are more apt for big-ticket expenditures. Some of the cases in which one can opt for a personal loan are as follows:
Individuals facing unexpected medical expenses over and above their medical insurance coverage can opt for a personal loan. Even though the rates are high, they are convenient for dealing with medical emergencies.
Individuals having multiple loans can consolidate them by opting for personal loans. It will allow them to group their borrowings under one umbrella and repay within the specified time period.
People getting married or organising a large cultural or religious event can opt for personal loans.
This is not an exhaustive list and just a few examples of how individuals use their personal loans usually.
Here are common uses of credit cards:
Individuals can use their credit cards when they need to buy something within the credit limit. Financing the purchase via easy EMIs can ease the financial burden. These are mostly for small-ticket purchases and daily requirements.
One can get rewards or cashback points by making any purchase or paying bills using credit cards.
This is not an exhaustive list and just a few examples of how individuals use their credit cards usually.
Personal loans and credit cards provide benefits to individuals and allow them to meet their immediate requirements. However, one should check the terms and conditions of lenders before opting for the same.