Personal Loan vs Credit Card Loan: Which is Better?

When you need quick funds, you have two popular borrowing options: personal loans and credit card loans. While both provide instant access to money, they differ significantly in interest rates, repayment terms, and suitability for different financial needs. This comprehensive comparison will help you choose the right option.

Understanding Personal Loans

A personal loan is a lump-sum amount borrowed from a bank or NBFC, repaid in fixed monthly installments (EMIs) over a predetermined tenure (typically 1-5 years).

Key Features of Personal Loans

Loan Amount: ₹50,000 to ₹40 lakhs (depending on income and credit score)

Interest Rate: 10.5% to 24% per annum

Good credit score (750+): 10.5-14%
Average credit score (650-749): 15-18%
Low credit score (<650): 19-24%

Tenure: 1 year to 5 years (some lenders offer up to 7 years)

Processing Fee: 1-3% of loan amount (typically ₹1,000-₹5,000 for small loans)

Processing Time:

Instant approval for existing customers with pre-approved offers
1-3 working days for new customers

Advantages of Personal Loans

✅ Lower Interest Rates: 10.5-18% vs 36-48% on credit cards

✅ Fixed Repayment Schedule: Predictable EMI makes budgeting easier

✅ Higher Loan Amounts: Can borrow ₹5-40 lakhs for major expenses

✅ No Collateral Required: Unsecured loan based on income and credit score

✅ Longer Repayment Period: Spread repayment over 1-5 years to reduce monthly burden

✅ Builds Credit History: Regular EMI payments improve credit score

✅ No Hidden Charges: Most fees disclosed upfront

Disadvantages of Personal Loans

❌ Prepayment Penalties: 2-5% penalty for early closure (some banks waive after 1 year)

❌ Processing Fee: 1-3% of loan amount reduces the actual amount received

❌ Fixed Commitment: Must pay EMI even if you don't need money anymore

❌ Documentation Required: Income proof, bank statements, employment details

❌ Not Suitable for Small Amounts: For ₹10,000-20,000, processing fee makes it expensive

❌ Hard Inquiry on Credit Report: Application impacts credit score slightly

Understanding Credit Card Loans

Credit card loans come in various forms:

Revolving Credit: Using your credit card for purchases and carrying a balance
EMI Conversion: Converting large purchases into installments
Cash Advance: Withdrawing cash from ATM using credit card
Balance Transfer: Moving high-interest debt to a 0% APR card

Key Features of Credit Card Loans

Available Amount: Up to your credit card limit (₹50,000-₹5 lakhs typically)

Interest Rate:

Revolving balance: 36-48% per annum (3-4% per month)
EMI conversion: 12-18% per annum
Cash advance: 2.5-3.5% instant fee + 36-48% annual interest

Tenure:

Revolving: No fixed tenure (pay anytime)
EMI conversion: 3-24 months

Processing Fee:

Revolving: No fee
EMI conversion: ₹99-₹499
Cash advance: 2.5-3.5% of withdrawn amount

Processing Time: Instant (if you have available credit limit)

Advantages of Credit Card Loans

✅ Instant Access: Use existing credit limit immediately

✅ No Application Process: No documentation or approval required

✅ Flexibility: Borrow as much or as little as needed

✅ Interest-Free Period: 20-50 days grace period if paid in full

✅ Rewards and Cashback: Earn 1-5% back on purchases

✅ No Processing Fee: (except for EMI conversions and cash advances)

✅ Revolving Facility: Pay back and reuse the credit

✅ Purchase Protection: Many cards offer insurance on purchases

Disadvantages of Credit Card Loans

❌ Very High Interest Rates: 36-48% annual rate on unpaid balances

❌ Minimum Payment Trap: Paying only minimum creates long-term debt

❌ Limited Borrowing: Can only use up to credit card limit

❌ No Grace Period on Cash: Cash advances attract immediate interest

❌ Easy to Overspend: Convenience can lead to unnecessary debt

❌ Penalty Fees: Late payment (₹500-₹1,500), over-limit (2.5% of excess)

Personal Loan vs Credit Card Loan: Head-to-Head Comparison

Factor	Personal Loan	Credit Card Loan
Interest Rate	10.5-24% per annum	36-48% per annum
Best For	Large planned expenses	Short-term urgent needs
Loan Amount	₹50,000 - ₹40 lakhs	Up to credit limit (₹50K-₹5L)
Processing Time	1-3 days	Instant
Documentation	Required (income proof, etc.)	Not required
Processing Fee	1-3% of amount	₹0 (₹99-499 for EMI)
Repayment Tenure	1-5 years	Flexible (or 3-24 months for EMI)
Early Repayment	2-5% penalty	No penalty
Credit Impact	Hard inquiry + new account	No new inquiry
Monthly Commitment	Fixed EMI	Flexible (minimum payment option)
Interest-Free Period	No	Yes (20-50 days if paid full)
Best Credit Score Needed	750+ for best rates	700+ for decent limit

When to Choose a Personal Loan

1. Large Expenses (₹1 Lakh+)

Medical emergencies: ₹2-5 lakh hospital bills
Wedding expenses: ₹3-10 lakhs
Home renovation: ₹2-7 lakhs
Higher education fees: ₹5-20 lakhs

Why personal loan: Lower interest rate saves ₹20,000-₹50,000+ in interest vs credit card.

Example:

₹5 lakh at 14% for 3 years = Total interest ₹1.16 lakhs
₹5 lakh on credit card at 42% for 3 years = Total interest ₹3.5+ lakhs
Savings: ₹2.34 lakhs!

2. Debt Consolidation

If you have multiple credit card debts at 40%+ interest, consolidate into one personal loan at 12-16%.

Example:

3 credit cards with total debt: ₹3 lakhs at avg 40% = ₹10,000/month just in interest
Personal loan at 14% = ₹4,200/month interest
Savings: ₹5,800 per month

3. Predictable Repayment Needed

Fixed EMI helps with budgeting and ensures debt-free date is known upfront.

Suitable for:

Salaried individuals who prefer fixed monthly commitments
People who lack discipline with credit cards
Long-term financial planning (buying assets, starting business)

4. Building Credit Score

Regular EMI payments for 2-3 years significantly boost credit score (by 50-100 points).

When to Choose a Credit Card Loan

1. Small Urgent Expenses (Under ₹50,000)

Medical emergency: ₹10,000-30,000
Gadget repair/replacement: ₹15,000-40,000
Travel emergency: ₹20,000-50,000

Why credit card:

Instant access
If repaid within 20-50 days, zero interest
Processing fee on personal loan (1-3%) makes small loans expensive

2. Short-Term Cash Gap (1-2 Months)

Waiting for salary, bonus, or payment from client.

Strategy: Use credit card, get 45-day grace period, repay in full when money arrives = ₹0 interest.

3. Rewards and Benefits

For planned purchases where you'll pay in full:

Electronics (get 5% cashback)
Travel bookings (earn points + insurance)
Online shopping (cashback + offers)

4. 0% EMI Offers

Many merchants offer 0% EMI on credit cards for 3-12 months:

Electronics (phones, laptops, TVs)
Appliances (AC, refrigerator, washing machine)
Travel packages

Note: Verify if it's true 0% or has hidden processing fee.

5. Already Have Available Credit Limit

No point applying for personal loan if you already have ₹2 lakh available on credit card and need ₹1 lakh urgently.

Smart Strategies to Use Both

Strategy 1: Credit Card for Immediate Need + Personal Loan for Refinancing

Use credit card for emergency (instant access)
Apply for personal loan within 10 days
Use personal loan to pay off credit card
Repay personal loan at lower interest

Saves: 3-4 weeks of high credit card interest while personal loan gets processed.

Strategy 2: Balance Transfer to 0% Credit Card

Some credit cards offer 0% interest on balance transfers for 6-12 months:

Take personal loan for immediate need
Transfer balance to 0% credit card
Repay during interest-free period

Best cards for balance transfers:

HDFC Regalia: 0% for 12 months
Axis Bank cards: 0% for 9 months
SBI Elite: 0% for 6 months

Strategy 3: Use Credit Card for Short-Term, Personal Loan for Long-Term

Credit card: Expenses you'll repay in 1-2 months
Personal loan: Expenses needing 12+ months to repay

Real-Life Scenarios: What Should You Choose?

Scenario 1: Medical Emergency - ₹2 Lakhs Needed

Best choice: Credit card (immediate) → Personal loan (within 10 days)

Reasoning: Can't wait 2-3 days for personal loan approval during medical emergency. Use credit card, then refinance with personal loan to avoid high interest.

Scenario 2: Wedding Expenses - ₹5 Lakhs, 2 Months Away

Best choice: Personal loan

Reasoning: Have time to apply, much lower interest rate (save ₹2+ lakhs), can negotiate best rates by comparing multiple banks.

Scenario 3: New iPhone - ₹80,000

Best choice: Credit card on 0% EMI offer

Reasoning: Most electronics retailers offer 6-12 month 0% EMI on credit cards. Personal loan processing fee (₹2,000-3,000) makes it uneconomical for this amount.

Scenario 4: Paying Off ₹3 Lakh Credit Card Debt

Best choice: Personal loan (debt consolidation)

Reasoning: ₹3 lakh at 42% = ₹10,500 monthly interest. At 14% personal loan = ₹3,500 monthly interest. Save ₹7,000/month.

Scenario 5: Starting a Small Business - ₹10 Lakhs

Best choice: Personal loan (or business loan if eligible)

Reasoning: Need longer tenure (3-5 years), lower interest rate crucial for business viability, credit card limit likely insufficient.

Frequently Asked Questions

Which option is cheaper overall?

Personal loans are almost always cheaper if you need money for more than 2 months. Credit cards cost 3-4% per month (36-48% annually) vs personal loans at 10.5-18% annually.

Can I use a credit card cash advance instead of a personal loan?

Not recommended. Cash advances attract:

2.5-3.5% instant fee
40%+ annual interest from day 1 (no grace period)
Lower credit score impact

Always prefer personal loans over cash advances.

What if I can't get approved for a personal loan?

Try:

Secured personal loan (against fixed deposit, gold, property)
Peer-to-peer lending platforms
Credit card EMI conversion (12-18% vs 40% revolving)
Co-applicant or guarantor for personal loan

How can I get the best personal loan interest rate?

Maintain credit score 750+ (check free on BankBazaar, Paisabazaar)
Have stable employment (2+ years in current job)
Keep debt-to-income ratio low (EMIs < 50% of income)
Negotiate with multiple banks (compare at least 3-4 offers)
Use pre-approved offers from existing bank relationships

Should I take a personal loan to pay off credit card debt?

Yes, absolutely – if:

You have ₹50,000+ credit card debt
Personal loan rate is at least 10% lower than credit card
You commit to not accumulating new credit card debt
You can afford the EMI comfortably

This strategy can save ₹30,000-₹50,000 per lakh of debt.

Conclusion

Choose Personal Loan when:

You need ₹1 lakh or more
Repayment will take 6+ months
You want lower interest rates (save 50-70% on interest)
You need predictable fixed EMI
You're consolidating high-interest debt

Choose Credit Card Loan when:

You need money instantly
Amount is under ₹50,000
You can repay within 1-2 months (use grace period)
You want to earn rewards/cashback
Merchant offers 0% EMI

Best practice: Use credit card for short-term (1-2 months) flexibility, refinance with personal loan for longer needs.

Ready to compare personal loan options? Visit Creditlo to find the lowest interest rates from top Indian banks!

Disclaimer: Interest rates mentioned are approximate and vary by lender, credit score, and market conditions. Always read loan terms and conditions carefully before borrowing.