At one point or the other, an individual finds himself in need of immediate cash or credit. Often he does not have sufficient funds to fulfill the need. At these points, one can either opt to go for the traditional personal loan or a credit card loan with a swipe. Therefore, there are essentially two options. It’s easy to choose if one has a clear understanding of the two. Gaining that understanding needs you to draw a comparison between the two. This Personal loan and Credit card comparison should be based on your needs and situation.
Let us first have a look into what they essentially mean-
A personal loan is basically a loan taken for different purposes. These loans are usually unsecured, and the reasons may range from expensive purchases and a vacation to medical reasons and debt consolidation.
These loans are the most common and are characterized by a high rate of interest. This is because of their unsecured nature. However, there are certain secured loans as well, which may be considered as a personal loan, for example – home loans and auto loans. These have collateral attached to them.
Credit Card Loan
A credit card loan is a pre-approved loan. The key highlight is that this loan requires no documentation. Unsecured credit cannot get any faster than a credit card loan. Usually, there is a particular part of your credit card limit that is not touched and is unused. That very part is offered as a loan. A credit card loan is not at all the same as a cash withdrawal.
Credit card loans are also of unsecured or secured nature, depending on the unsecured or secured nature of the credit card itself. Unsecured cards provide credit without asking for any sort of collateral. However, secured cards are great alternatives for borrowers if they have a low credit score. A secured card asks the borrower to give a capital towards the credit card’s balance limit.
Personal Loan versus Credit Card Loan – A Brief Comparison
To a layman, a personal loan and a credit card loan may seem similar. However, they are not exactly the same despite the striking similarities. The key differences can be listed out as below:
#1. Need for Documentation
In case you are going to avail a personal loan, you are going to need a lot of documents to get the approval. The whole procedure takes some days to process completely. It may strike as inconvenient to some since it is hectic indeed. On the other hand, a credit card loan is free of such documentation. Owing to this, it is much more convenient and a lot faster to attain too.
#2. Interest Charged
Every borrower should know and understand the importance of interest charged when taking a loan. It is the most important factor that one must consider when opting for a loan.
Personal loans are most commonly given at an interest rate in the range of 13 to 22 percent. On the other hand, loans on credit cards are given at an interest rate in the range of 10 to 18 percent. The difference is not that huge.
While personal loans are available with reducing balance rates, a credit card loan is available at flat interest rates. They are different as:
In case of a reducing balance loan, as the name itself suggests, the interest outflow decreases as the principal is paid and when the principal is paid. In the case of flat-rate loans, monthly interest is imposed on the initial loan amount. It stays the same from the beginning all the way to the end of the tenure. Even if the principal amount decreases, the interest is unaffected.
#3. Unsecured Loan
This is a similarity between the two loans. Both personal loans and credit card loans are mostly of unsecured nature, that is, if home loans, auto loans, etc. are not considered as personal loans. There is no collateral involved of any kind, attributing to the high rates of interest.
The tenure for which the loan is taken varies. Usually, a personal loan is taken for a much longer duration. On the contrary, credit card loans can be and are usually taken for comparatively shorter tenures and time periods.
#5. Loan Amount
A personal loan is the most suitable when you wish to avail of a huge loan asking for a huge sum of money. On the other hand, a credit card loan suits best and is a suitable option when you wish to avail of a short loan asking for a short sum of money.
Thus, even though they look the same to the untrained eye, they’re, in fact, different. After having compared both loans, it’s much easier to choose the right one for you based on your financial need, the duration of the loan, and how soon you need the loan. Once clear about your needs, making the right choice becomes easy.