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Personal loan: How to make the right choice

Personal loan usually is the most common and obvious choice for people during a financial crisis. It is an easy and swift solution that can bail you out of financial emergencies. However, there’s another option that most, including credit card holders, are unaware of — loans against credit cards.

Personal loan: How to make the right choice

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Gaurav Aggarwal 

Personal loan usually is the most common and obvious choice for people during a financial crisis. It is an easy and swift solution that can bail you out of financial emergencies. However, there’s another option that most, including credit card holders, are unaware of — loans against credit cards. As most of its features are similar to personal loans, choosing between the two can be confusing. Here’s a comparative analysis that would make your decision easier:

Processing time: Being pre-approved loans, credit card loans have probably the quickest processing time of all loans. All you need to do is call the customer care number of your credit card issuer or apply online. There is no requirement of any physical documentation. Funds, in case of credit card loans, are usually disbursed within the same day of application. In case of personal loans, while an applicant can apply online, he still needs to physically submit his pay slips, ITR forms and KYC documents to get his loan processed. Disbursal of funds in a personal loan generally takes two to seven days.

Eligibility: Credit card loans are usually pre-approved offers for customers on the basis of type of card, spends on that card and their bill repayment history. Only existing cardholders can avail the credit card loan. The eligibility for a personal loan depends on your credit score, monthly income and other criterion. But, it is not mandatory to have an existing relationship with a lender to avail a personal loan.

Loan amount: The loan amount in case of personal loans usually ranges between Rs 50,000 and Rs 15 lakh. However, the quantum of loan amount will also depend on your repayment capacity and loan tenure. In case of credit card loans, the maximum loan amount will be limited to the available credit limit. For example, if the credit limit on your credit card is Rs 1 lakh and you have already spent Rs 25,000 through that card, then you can avail a loan of up to Rs 75,000 on that card.

Taking a loan on your credit card will also limit your future spends through the card with the credit limit blocked by the loan amount.

Some banks, however, do provide credit card loans over and above yourcredit limit where the loan amount will not be blocked against the credit limit.

Interest rate: The interest rates of personal loans can range anywhere between 10.99% and 24% p.a., depending on your credit score, monthly income, employer, loan amount, repayment tenure etc. For loans against credit cards, interest rates are usually between 12% and 18%.

Loan tenure: The tenure for repayment of personal loans usually ranges between 1 and 5 years. The upper limit on most credit card loans is also 5 years; however, the lower limit of the loan tenure can be as low as 3 months.

Processing charges: Processing fees of personal loans range anywhere between 0-2.50% of the loan amount. As loan against credit card is usually pre-approved loans, they come with a lower processing fee of around 1%. Take into account your total interest cost while using processing fees as a yardstick for choosing between personal and credit card loans.

Hence, opt for a credit card loan if you require funds instantly and your loan amount is small, which you plan to repay within 12 months.

Apart from zero documentation and instant disbursal, the certainty of getting the loan approved is higher than personal loans. Otherwise, prefer personal loans as they usually come with higher loan amount and lower interest rates. Moreover, availing personal loans does not block your credit limit on your card.

But before making a decision, contact your primary banker and credit card issuer to find the best personal loan and credit card loan offers, and then compare them with alternative personal loan offers online on the websites of loan aggregators.

The writer is Vice-President, Paisabazaar.com. The views expressed in this article are his own

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