Growing up, I remember watching those old Bollywood films in which either the father (or in case of his absence), the mother of the protagonist would feel small and indebted to the jeweller or landlord because of the huge amount of loan he/she would have taken. I'd always think to myself - can't people do with what they have? Why should they borrow money in the first place?
But of course, I grew up, and I learnt that if there is anything worse than laundry, it is making ends meet, and budgeting goes for a dip in the ocean when some urgent need or emergency crops up.
Most middle-class families have taken a personal loan at some or the other point of time. In this article, I am going to talk about the pros and cons of credit card loans vs personal loans.
However, let us do a comparative analysis of both the loans first.
- Easy Availability
Credit card loans are hands down winners here. One simply needs to call up his/her bank or talk to the customer care in order to avail a credit card loan equivalent to the balance remaining in his credit card limit. This is, of course, if one owns a credit card in the first place.
On the other hand, while one can apply for a personal loan online, one needs to submit his payslips, Form 16, bank statements and KYC documents for getting the loan application physically processed.
This is an important consideration in case of emergencies, and a deal breaker in some cases. Again, here, credit card loans are the better option. If all other factors are in place (decent credit history and sufficient pending amount in the credit card limit) one can get a loan within 48 hours flat. Even faster!
While we are flooded with advertisements of 'easy, fast personal loans' on television and radio, the matter of fact is that they can take up to a week at times.
3. Interest Rates
One doesn't need to be a genius to figure out why this is another important factor. However, you won't find the answer to that point here, since it depends on your bank.
Since credit card loans are pre-approved, banks are very cautious about giving this option to its customer. Hence, only select customers with good credit history can avail credit loans. Moreover, the interest rates can vary, not only from bank to bank, but also from one customer to another within the same bank. For example, ICICI decides the ROI for credit card loans based on the amount of loan and the customer's credit history. On the other hand, Standard Chartered gives credit card loans for interest starting low as 1.17% per month. Hence, check with your bank for the ROI for you.
As is the common knowledge, ROI on personal loans are negotiable for the most part and again, depend on various factors. However, the general rule of thumb is somewhere from 13-22% interest. Again, check with your bank.
4. Tenure of Loan
Quite often, the need for a loan might arise simply out of the need of a 'filler' for a short period of time. In such cases, again, credit card loans are ideal options as they can be availed for much shorter durations as compared to personal loans. Moreover, they are available for smaller amounts as compared to latter.
It might seem like credit card loans are ideal, but there are a few things one should keep in mind before making any decision.
- Account for the service tax that you will pay on the interest on credit card loans every month. This can considerably change the overall cost of taking a loan.
- The penalty that you would have to pay in case you can't pay back your credit card loan on time would end up making the cost of your loan much bigger. Hence, make sure you have enough provisions for the same.
- Some banks might reduce the credit limit on your credit cards if you have availed a loan against them. This may hamper your day-to-day functioning which is dependent on credit cards.
As with most financial decisions, there is no thumb rule when it comes to choosing between a credit card loan and a personal loan. Make a comparative analysis after consulting your bank, and take smarter decisions for a better future.