Personal Loan or Credit Card Loan – What’s the Smarter Option?

More and more people are borrowing today, and it has reached an unprecedented level. This includes household financial liabilities in India, as credit card debt and personal loans have touched a staggering ₹120.96 lakh crore as of the end of March 2024. This massive increase, caused by increase in borrowers compared to increased personal debt, highlights the growing relevance of the debate: credit card loan vs personal loan — and why choosing the right option is critical today.

Knowing whether a personal loan vs credit card loan suits your financial needs better can have a big impact on your purchasing power and repayment discipline, especially in light of government initiatives to reduce household financial strain.

What is a Personal Loan?

Definition and Features

A personal loan is a lump sum of money borrowed from a lender, often for specific purposes like home improvement, debt consolidation, or medical expenses. It typically comes with fixed monthly payments over a set term.

Common Uses

• Debt consolidation

• Large purchases (e.g., car, wedding expenses)

• Emergency expenses

Key Features

• Fixed interest rate

• Fixed repayment term (e.g., 12-60 months)

• No revolving credit

What is a Credit Card?

Definition and Features

A credit card provides a revolving line of credit, which you can use repeatedly up to your credit limit. Payments are made monthly, and unpaid balances accrue interest.

Common Uses

• Everyday purchases

• Building credit history

• Short-term borrowing for emergencies

Key Features

• Variable interest rates

• Revolving credit line

• Rewards and cashback options

Loan on credit card vs personal loan: Understanding the difference

Key Differences

Personal Loan Credit Card Loan
Eligibility Open to both bank customers and non-customers. Limited to credit card holders.
Loan Type Unsecured — no collateral required. Unsecured — no collateral required.
Application Process Certain documents are required for verification. No additional documentation is required; the lender already has personal and financial details.
Documentation Requires multiple documents and formal verification. Minimal or no documentation required.
Approval Time Typically approved within 3–5 working days. Usually approved within 24 hours.
Disbursal Method Paid as a lump sum to applicant’s account or via cash/cheque. Transferred directly to savings/current account.
Loan Amount For larger amounts depending on income and credit history. Depends on the pre-approved credit card limit; suitable for smaller amounts.
Borrowing Limit Based on your creditworthiness, typically higher Determined by your credit limit
Tenure / Loan Duration Longer repayment tenure (months to years). Shorter tenure.
Interest Rate Comparatively lower, fixed interest rates (e.g., 6%–20%). 15%–30% annually
Interest Type Usually reducing balance — interest decreases as principal is repaid. Flat rate typically — interest charged on full amount throughout tenure.
Repayment Structure Fixed EMIs over a defined tenure; structured plan. Added to monthly credit card bill; more flexible but higher risk of revolving debt.
Additional Charges May include processing fees and other charges. No additional charges apart from interest.
Overall Cost Lower cost for longer/larger loans if credit score is good Higher cost due to flat interest and shorter tenure
Credit Score Impact Positive if EMIs are paid on time; defaulting affects score High credit utilization can negatively impact score; late payments harm it more severely
Flexibility Less flexible; ideal for one-time large expenses. More flexible but can lead to debt build-up if not managed.
Best Suited For For planned high-value requirements like home renovation, education, etc. For short-term requirements including urgent cash needs or emergencies.

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*Required min. salary 30k and cibil 500+
*Required min. salary 30k and cibil 500+

When to Choose a Personal Loan?

Ideal Scenarios

1. Debt Consolidation: Consolidating multiple high-interest debts into one loan with a lower interest rate.

2. Planned Large Purchases: Financing weddings, medical bills, or home improvement projects.

3. Emergency Needs: Addressing one-time urgent expenses that exceed your savings.

When to Choose a Credit Card?

Ideal Scenarios

1. Small, Ongoing Expenses: Handling everyday purchases like groceries or utilities.

2. Short-Term Financing: Paying for items you can repay within the grace period to avoid interest.

3. Building Credit: Regular use and timely payments can improve your credit score.

Pros and Cons: Personal Loan or Credit Card

Personal Loan

Pros :

• Predictable monthly payments

• Lower interest rates

• Larger borrowing limits

Cons :

• Limited flexibility

• Requires good credit for low rates

• Possible origination fees

• Credit Card

Credit Card

Pros :

• Ongoing access to funds

• Rewards programs and perks

• No interest if paid within the grace period

Cons :

• Higher interest rates

• Risk of overspending

• Minimum payments can lead to long-term debt

Deciding What’s Right for You

The choice between a personal loan vs credit card depends on your financial needs:

• Choose a personal loan for large, planned expenses or debt consolidation.

• Opt for a credit card for everyday purchases or short-term borrowing.

By understanding your goals and repayment capacity, you can make the best decision and maintain your financial health.

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Personal Loans from Ayaan Finserve India are designed to satisfy the demands of today’s professional who are in search of a quick, safe and no-nonsense borrowing. With no collateral, immediate disbursal within minutes and little to no paperwork, AFI guarantees you get anywhere from ₹5,000 to ₹50,000 – whether you are handling bills, or organising purchases, AFI stands with you

At AFI, we believe in picking a lending partner who supports your objectives and keeping things straight – no fluff. If you're wondering is a personal loan better than credit card debt for your goals, AFI's personal loans offer you the clarity and structure to make that decision easy. What are you waiting for? Apply for an AFI Instant Personal Loan to borrow money without worrying.

Frequently Asked Questions

Q1: What is the main difference between a personal loan and a credit card?

A: A personal loan provides a lump sum with fixed repayments, while a credit card offers a revolving credit line for ongoing expenses.

Q2: Which has lower interest rates: personal loan or credit card?

A: Personal loans typically have lower interest rates compared to credit cards, especially for borrowers with good credit.

Q3: When should I use a personal loan?

A: Use a personal loan for large, planned expenses like home renovations, medical bills, or debt consolidation.

Q4: Are credit card loans considered term loans?

A: A personal loan is one that gives you a predetermined amount of money that should be repaid over a set length of time in monthly installments - with interest. You can borrow up to your credit limit, repay it, and borrow again using credit card loan, which is the same as a revolving line of credit. This outlines the fundamental difference between personal loan and credit card loan.

Q5: Does a personal loan impact my credit score?

A: It is true that a hard inquiry may lead your credit score to drop a few points after obtaining a personal loan, a personal loan itself isn't usually harmful to your credit score. In fact, if you use this loan to consolidate credit card debt and make on-time payments, it might as well be beneficial for your credit.