09 MARCH, 2022

There are times when an individual may need funds urgently. It could be a wedding, a trip, house renovation, high ticket purchase or a medical emergency. You may need to borrow funds to fulfil these financial needs. You have two options that are popular and easily available — a personal loan or a loan on a credit card.


Both personal loan and credit card loan are unsecured loans issued without any collateral or security. Which one should you go for, and what are the pros and cons to weigh? Let us find out.


  • Eligibility


A personal loan is provided by a financial institution based on your income, employment details and credit history. You need to submit your documents, and the loan is sanctioned after necessary approvals. You can avail a personal loan online from the comfort of your home.


A credit card loan is disbursed based on the available credit limit on your credit card; it is usually a pre-approved loan. If you have been paying your card outstanding regularly on time and have a good overall usage, the loan is sanctioned easily. There is no documentation required for this loan. However, your creditworthiness determines the eligibility here as well.


  • Interest Rate


The personal loan interest rate varies from 10% to 24% per annum, depending on your income, employment and credit history. Personal loans offer reducing balance interest rates, i.e. interest is calculated on the outstanding amount every month.


The interest rate on a credit card loan is flat, i.e. interest is calculated on principal amount throughout the tenure. The interest rates can go up to 3.6% per month on credit card loans, depending on the issuer. There are steep penalties for delays in payments.

For instance, if you plan to take a loan of Rs 1,00,000 with a flat rate of 10% for a tenure of 5 years, you’ll have to pay Rs 20,000 (principal repayment/tenure) + Rs 10,000 (rate/principal) = Rs 30,000 or Rs 2500 per month. Over the entire period, you’ll be paying Rs 1,50,000 (5000*12*5).


  • Loan Amount


The maximum personal loan amount is up to Rs 20 lakhs, depending on your personal loan eligibility. The maximum loan amount you can avail of from a credit card is capped at up to Rs 5 lakhs.


  • Tenure


A personal loan can be taken for longer periods of up to 60 months, whereas a credit card loan can be taken for a short term. The maximum tenure is up to 48 months.


  • Discipline of Payment


A personal loan is repaid through monthly EMIs via a cheque or bank account. A credit card loan EMI is added to the monthly card bill. At times you may miss the payment or may defer part payment to next month by paying the minimum due amount. You can check the personal loan EMI calculator online to know your monthly EMI.


In such cases, there is a heavy interest penalty levied on the outstanding amount. A credit card loan is a revolving debt that can balloon into a debt trap if not managed with strict payment discipline.


In a nutshell, a credit card loan is suitable as an option in case you need a small amount of cash for a short duration.


A personal loan is a great option when it comes to urgent cash requirements because of the convenient and easy application process, choice of longer tenure and higher loan amount that can be availed. You can get attractive interest rates based on your income and credit score. Apply for a personal loan today!


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Disclaimer: This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. The Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Article. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from the Bank. The Bank, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein. Tax laws are subject to amendment from time to time. The above information is for general understanding and reference. This is not legal advice or tax advice, and users are advised to consult their tax advisors before making any decision or taking any action.