Loan Basics. Personal loan or loan on credit card?

You are in urgent need of money but do not have an asset to offer as collateral. A personal loan is probably what comes to your mind. But there’s another option that you can consider — a loan on credit card. It is a pre-approved loan where your bank lends you up to a certain percentage of your unutilised credit card limit. Some banks also offer loans exceeding this limit.

A personal loan and a loan on credit card are very similar but not identical. Depending on your requirement, you can choose one of them.

Both a personal loan and a loan on credit card are unsecured — that is, they do not require collateral. Charges such as interest rates and loan processing fee are also similar. The interest is calculated based on the reducing balance method and the loans are repaid through EMIs (equated monthly instalments).

Also, while both the loans can be pre-paid, a penal rate of interest is levied (on the outstanding principal amount) by some banks. Additionally, for personal loans, certain banks allow pre-payment only after a few EMIs have been paid off. A loan on credit card can be pre-paid anytime.

HDFC Bank’s Insta Loan (credit card loan) comes at an interest rate of 15 per cent per annum and a processing fee of 1 per cent of the loan amount. You can take a personal loan from the bank at an interest rate of 15.75-20 per cent per annum (can be lower for the bank’s customers) and a processing fee of up to 2.5 per cent of the loan amount. Pre-payment entails a penal charge of 3 per cent on an Insta Loan and 2-4 per cent on a personal loan.

But, the latter can be pre-paid only after 12 EMIs have been paid off. At Axis Bank, a loan on credit card comes at an annual interest rate of 21 per cent.

For a personal loan, the interest varies between 15.5-24 per cent per annum. While there is 3 per cent pre-payment penalty on a credit card loan, there is no such charge on a personal loan.

But there a few differences between the two. First and foremost, for a personal loan, you don’t even need to be a customer of the bank, while for a credit card loan, you must have the bank’s credit card. Being the bank’s customer though, can get you more favourable terms on your personal loan.

If you want to borrow a relatively small amount, then a credit card loan may be more suitable. For example, SBI credit card holders can borrow as little as ₹10,000 using the bank’s ‘Encash’ facility. But, under the bank’s Saral Personal Loan, the minimum loan limit (for a person residing in an urban area) is ₹24,000. Likewise for Axis Bank, the minimum that can be borrowed via a loan on credit card is ₹25,000; for a personal loan, it is ₹50,000. IndusInd Bank too can extend you ₹5,000 as a loan on credit card but the minimum that can be lent as a personal loan is ₹50,0000.

Conversely, if you want to borrow a large sum, a personal loan may be more suitable. The amount that can be lent to a person as a loan on credit card is a function of his credit limit, which though will be revised overtime (not commensurate with an increase in salary), may not still enable a person to get a large enough loan. On the other hand, based on his current income, a person can get a large personal loan.

A credit card loan scores a tad higher in terms of convenience too. You do not need to submit any documents while applying for a loan on credit card.

In fact, you can apply for the loan online or by calling on the bank’s helpline and have it approved even in a matter of few hours.

The loan amount will be credited to your account or paid to you through a cheque or demand draft. While you can apply online for a personal loan too, you have to submit a few documents such as address proof, bank statements and salary slip. This can take a few days’ time.

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