Should you trust credit card loan/personal loan?

Choose the right loan, with discretion

Vijay is a Mumbai-based entrepreneur who holds a credit card with a limit of Rs 2.5 lakh. One day he realised that he was running short of Rs 1.5 lakh to settle a bill of some imported goods. He needed to raise that in two days’ time. Vijay was in a dilemma whether he should swipe his credit card for a loan or approach his bank for a personal loan. He enquired his credit card company and came to know that he could avail credit card loan at no extra cost. Moreover, it would come at an interest rate of 1.25 per cent per month.

Like Vijay, for many entrepreneurs, the journey is often filled with dilemma for quick fund raising like clearing bills, settling credit, logistics management, etc. One may not always have the time for approaching a bank for a business loan for such miscellaneous expenditure which may recur.

Both personal loans and credit card loans are unsecured in nature and have several similarities. Because of this same reason, people often fail to distinguish between the two and go for the easiest available option without analysing. Let’s make a comparison between these two popular credit sources taking Vijay’s case as an example.

Vijay who believed that loans on credit cards are not feasible was advised by his friend to go for it for the following reasons:

Interest Rate: If Vijay opts for a personal loan, he will have to pay an interest of 16 per cent per annum. This was higher as compared to credit card loan. It is true that the interest charged by credit card companies on revolving credits often burns one’s hands. But the EMIs on credit card loans are lower than this.

Processing fee: Personal loans are subjected to processing fee which will be around two per cent to five per cent of the amount availing. On the other hand, loan against credit card is often offered without processing charges. Further, there is also an option to convert the total outstanding amount into six -month EMI without any additional charges.

Foreclosure: Foreclosure of personal loans is often accompanied by charges which is often two per cent to five per cent of the outstanding amount. However, credit card loans are not subjected to foreclosure charges, and could be closed at any time before six months. As Vijay was expecting the maturity of one of his investments after five months, he was planning this loan as a temporary financial supplement for the period.  

Processing Period: Personal loans usually take anywhere between 48 hours to one week to get disbursed after submission of the papers as the bank needs verification and other formalities to be done before processing. On the other hand, credit card loan is instant. All you have to do is to make a call at the customer care to convert the swiped amount to EMIs.

Eligibility Criteria: If you apply for a personal loan, the bank has to fulfil all the due diligence with all papers, even if it is an existing customer. Most often, application of business class, especially if it is a startup are likely to get rejected due to the risk factors considered by the credit manager.

On the other hand, a credit card company initiates due diligence only at the time of issuing a credit card and the credit limit will be pre-set after that. Post that, there will not be any other checking except timely payment of dues and a healthy re payment track.

However, it is not necessary that credit card loans are always better than personal loans.

If you are ever in requirement of such a short-term credit to bridge the gaps, check and compare all the factors mentioned above. Check if your credit card company is charging a processing fee or a higher interest rate than banks or a foreclosure fee.

Another important thing to be noted is that if you fail to pay an EMI on your credit card loan, you will be subjected to a higher interest on both the EMI as well as the entire outstanding balance for that particular month. On the other hand, personal loan charges only a return charge. This is the main thing that makes a credit card loan unfavourable for many.  However, a credit card loan is much easier to obtain than a personal loan. So evaluate the various factors before making your decision.

What are the factors you keep in mind while selecting your loan? Do share your views.