Personal loan is one of the quickest and most popular options for meeting financial shortfalls. However, those owning credit cards may choose to borrow against credit card, given that its features are almost similar to that of personal loans. (Note that loan against credit card is different from the credit card EMI option or conversion of credit card dues to EMIs).

Here is a comparative analysis of both the options, to choose between the two.

Loan eligibility

Card issuers sanction credit card loans to select cardholders, primarily on the basis of their card spends, card type and bill repayment history.

On the other hand, loan eligibility of personal loan depends on borrower’s monthly income, job profile, credit score, employer’s profile and other eligibility criteria. Remember, borrowers need not have an existing relationship with lenders while applying for a personal loan.

Loan amount

Loan amount in case of personal loans can range anywhere between ₹50,000 and ₹ 15 lakh. A few banks and NBFCs (non-banking financial companies) claim sanctioning of higher loan amounts of up to ₹40 lakh. Note that the sanctioned loan amount primarily depends on the borrower’s repayment capacity and loan tenure.

Credit card loan can be claimed only up to the predetermined loan limit sanctioned by the card issuer.

While the credit limit is temporarily blocked up to the sanctioned loan amount, it would eventually get freed as one pays off loan EMIs.

Claiming loan against credit card can adversely impact your spending capacity through that card, especially during financial emergencies. Some credit card issuers have started offering loan against credit card over and above the credit limit available on the card.

Processing time

Loan against credit card has one of the quickest processing times and is usually disbursed within just a few hours of applying. Given that loan against credit card is pre-approved, eligible cardholders do not have to submit any physical documentation. Instead, they only need to apply online through internet banking or contact customer care support.

Personal loan applicants, on the other hand, are required to submit their payslips/ITR forms and KYC documents to get their loan applications processed. As the verification of documents require time, personal loans are disbursed within seven days of submitting the loan application.

Interest rate

Personal loan interest rate can range anywhere from 10.50 per cent to 24 per cent pa, depending on the lender and the credit profile of the loan applicant. The interest rate for loans against credit cards is usually 1 per cent higher than personal loan rate. Hence, opt for personal loan if you can wait for up to a week.

Loan tenure

Personal loan tenure can be 1-5 years, with some lenders offering a minimum tenure of six months and a maximum of up to seven years. Credit card loan tenure can go up to five years, with most of the card issuers offering a minimum tenure of as low as three months. Its preferable to take credit card loan if you wish to pay off the loan amount in less than a year. Their shorter tenure would result in interest cost savings.

Processing charges

While the processing fee in the case of personal loans can go up to 3 per cent of the loan amount, many lenders waive it during festival seasons. In the case of loan against credit card, the processing fee can go up to 2.5 per cent of the loan amount.

Before finalising a loan, borrowers must compare the processing fee levied on personal loans with that on credit card loans.

Prepayment charges

Loan against credit cards usually come with prepayment charges of up to 3 per cent of the outstanding loan amount. In the case of personal loans, prepayment charges can go up to 5 per cent, depending on the lender.

However, banks, especially PSU ones, do not penalise prepayment as their personal loans are usually offered on floating rates. The RBI has debarred banks on penalising retail loans offered on floating interest rates. Hence, do compare the prepayment charges, too, as they can eat up a sizeable chunk of the savings in the interest cost generated through prepayment.

Choosing the right one

Opt for loan against credit card only if you have an immediate requirement for a smaller loan amount for a shorter tenure. The pre-approved nature of loan against credit card allows almost-instant disbursal with zero documentation.

Consider opting for personal loan if you require a comparatively bigger amount, with longer tenure and lower interest rate.

The writer is Director andHead of Unsecured Loans, Paisabazaar.com

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