Personal loan or credit card loan, which suits you best?

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If you want to make an expensive purchase, should you take a credit card EMI or a personal loan? This question comes to the minds of many people. Both loans have their own pros and cons and both operate on different financial strategies.

If you need funds for a big purchase, a personal loan could be the right option. It allows you to repay the loan in a structured manner. On the other hand, to take advantage of routine shopping and promotional offers, the credit card with EMI option could be more beneficial.

We can compare these two based on different parameters.

First, let’s talk about the borrowing limit. In a personal loan, the borrowing limit usually depends on your income and credit score. This means compared to a credit card, you can get a bigger amount with a personal loan. Conversely, with a credit card loan, you are limited to the credit limit available on your card.

Now, let’s talk about disbursement. How do you get the loan? In a personal loan, after approval, a lump sum amount is credited to your bank account. This can take a few days. In contrast, a credit card loan is immediately available. You can get funds up to your available credit limit instantly.

You can repay this amount by making purchases and converting them into EMI.

Speaking of documentation, when applying for a personal loan, you need to provide essential documents such as income proof, employment verification, and identity proof. Whereas, in most credit card loans, no additional documents are required because you have already provided most of the necessary documents when taking the card.

Now, let’s talk about the interest rate.

The interest rate on a personal loan is usually fixed and it is determined based on your credit score and the terms of the loan. This rate can be lower than credit card loans, which have varying interest rates.

There can also be different rates for EMI conversion on credit card loans. Another important parameter is borrowing type. A personal loan is an installment loan where you have to repay a fixed amount with interest within a set time limit.  Whereas, a credit card loan is a revolving line of credit where you can borrow up to your credit limit, repay the amount, and then borrow again.

Now, what are the  pros and cons of these two loans.

In a personal loan, you can get a large amount of loan. The interest rate can range from 10.5% to 24% and the loan tenure can be between 1 year to 5 years. Whereas, the interest rate on credit card EMIs starts from 12.5% and it can vary based on the bank.

Repaying a personal loan on time can improve your credit score.

The disadvantage of a personal loan is that interest rate can be higher for people with lower credit scores. If the credit history or score is not good then getting a loan can also be difficult. If you want to repay the loan early, you may have to pay an early repayment fee or pre-closure fee.

Counting the benefits of credit card EMI, you get an instant loan. There is almost no paperwork required. This loan can be beneficial in case of cash flow issues in the short term. High-value transactions can be converted into EMI and repayment can be done within 3 to 24 months.

Talking about the disadvantages, credit card loans can be more expensive in the long run. Especially if you haven’t paid off the balance on time. Since these loans are directly linked to your credit card’s available limit, these may also reduce your ability to make purchases for other needs. Also, the credit utilisation ratio can increase and all this will affect your credit score.

Moreover, due to easy availability of credit, you can indulge in unnecessary expenses which can increase the burden of debt on you.

Whether a personal loan or credit card EMI is better for you depends on your financial situation and financial goals. While a credit card loan or instant loan is suitable for immediate needs or short-term needs, personal loan is suitable for long-term needs.

However, when taking a loan, don’t just think about immediate needs. Also, consider its impact on your financial situation in the long term. Such as how it will affect your credit score. It is important to think about this. Only after considering all these factors, decide which loan will be right for you.