Comparison of Personal Loans and Credit Cards The Differences Between Personal Loans and Credit Cards

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You probably know that when you shop using your credit card, you’re borrowing money from the card issuer. This amount is paid to you by the card issuer when you complete the transaction. A credit card, therefore provides you with the option of a credit line (more details on credit lines later in the article) that you are able to borrow a maximum amount from the bank each month (this maximum amount is known as the credit limit of the card) and pay it back later at the end of the monthly statement cycle, or at least within the permitted grace period (usually 20 days after the conclusion of the cycle).

Line of Credit

A line of credit is a form of loan that permits you to borrow a range of amounts each month, up to an amount that is not too high. Since the loan is granted every month, it needs to be repaid every month. The statement you receive at the end of every calendar month lists all expenses.

If you pay no interest for a credit line you have been granted through the credit card you have, you are exempted from any charges for the amount you borrowed during that month. You get an interest-free period of up to 50 days.

Personal Loan

A personal loan, on the other hand is one that is a regular installment loan that is where the amount is lumped together is disbursed which you must repay in equally-spaced installments (monthly installments, in the majority of cases) within a set time frame.

Similarities between Personal loans and credit cards

Personal loans and credit cards are identical. In fact, both are unsecured loans. In contrast to home or education loans that require you to state the purpose for which you want to borrow and credit cards allow the use of your credit line to purchase anything.

One thing that is similar between personal credit cards and loans is that neither of them can be used for huge sums of cash. The maximum amount a bank will grant to a person who needs a loan typically is a couple of thousand dollars. This is also true for the credit limit of your credit card.

The differences between credit cards and Personal Loans

We’ll now compare credit personal loans and card loans based on various parameters such as ease of approval, interest rate, and more and then see how they differ from each other-

Easy Approval

As mentioned earlier that credit cards as well as personal loans are loans that are not secured- no collateral is required for issuance of credit cards or the grant of personal loans (there are certain credit cards, known as secured credit cards or credit-builder credit cards, that are issued on a fixed deposit, which is regarded as collateral). The card issuer or lender must be sure that you’ll be able to pay back the loan in full by the due date. Lenders and card issuers employ a variety of criteria to assess your creditworthiness. The credit score, your gross monthly income, and credit score are two of the most crucial.

Credit cards can only be granted against an account with an revolving credit. This means that you can only borrow a certain amount each month from the issuer. The eligibility requirements for credit cards are generally stricter than personal loans. Credit cards usually require a credit score above 700 and a steady income. However, a lot of banks will accept personal loans, even if you do not have a credit history.

If you’ve got poor credit and your credit card application gets rejected, again and again, you can always obtain a secured credit line against an unsecured deposit that can aid in bringing your credit rating into good standing.

Interest Rate

Credit cards come with an interest-free period of up to 50 days (from the date of your monthly statement cycle) as well as a grace period of 20 days period for payments made on the card. However, credit card issuers charge the highest interest rate of between HTML3_ 3.5 percent and HTML4_ 45 percent annually on unpaid amounts. What makes credit card interest so much more intimidating is the fact that it is calculated for each purchase individually right from the date of transaction, which means you do not get any time-free interest period in the event of default on payment.

Also read: How To Utilize Credit Card Interest-Free Time Period Carefully

Personal loan lenders typically charge comparatively lower interest rates that can range from 10 to 15% per annum. The interest rate is the same as any other installment loan, is applicable from the date of payment which can be used anytime according to the wishes of the borrower.

There are certain credit cards available in the market with a lower interest rate that personal loans. For instance, the HDFC Freedom Credit Card offers you the lower interest rate of 0.99 percent per month for the first 90 days after the card’s being issued. IDFC FIRST Bank also offers an interest rate as lower as 0.75 percent per month (or 9% per annum) on all their credit cards to cardholders who are selected (IDFC FIRST also has a variable interest rate policythat allows for different interest rates for different customers based on their financial habits). Federal Bank offers an interest rate of low for select cardholders.

The Application Process and Documentation

Nearly all lenders and issuers allow you to apply online for personal loans and credit cards through their websites or mobile applications. You can therefore apply for both, credit cards as well as personal loans online. However the documentation required for credit cards is more stringent than that for personal loans. Additionally, card issuers usually take some time (up to 15 days) to make a decision (approve/disapprove) regarding your credit card application while personal loans are approved and then released (if documents for loans have a digital signatures) immediately (particularly for loans borrowed from NBFCs).

Maximum Loan Amount

Although you aren’t able to take out a huge amount for personal loans, if you have a regular flow of cash in your bank account and a decent credit score (750+), what you will find is banks and NBFCs will lend you more amount in a personal loan that the credit limit they are willing to grant to your credit card.

Loan Tenure

You can enjoy an interest-free time that can last up to 50 days on purchases made with credit cards as you don’t have to pay interest if you settle the credit card bill in the full amount within 20 days (grace period) following the date of your statement. In case of not paying the balance in full, the remaining due amount is carried forward until the next cycle of statements and the interest (or finance charges) is levied on the same. The interest is calculated on an individual transaction basis for every purchase that takes place up to the date of the transaction till the full payment of the due amount. Revolving credit is carried forward to subsequent statement cycles so long as the card issuer permits it, although the interest and the principal amount will continue growing. Therefore, there isn’t a set tenure for the payment of the loan availed against the line of credit on the credit card.

Insofar as personal loans are concerned, unlike a line of credit the principal amount is set and needs to be repaid along with the applicable interest within a specific time period with equal monthly installments.

Consolidation Debts

If you owe multiple debts to multiple lenders, which may also include credit card debts you could consolidate all of existing debts (repay the debts with another loan) through either obtaining new personal loans or using one of your existing credit cards (balance transfer credit cards). Most card issuers allow customers to transfer the due amount from one of your banks credit cards to one of their credit cards. The typical benefit is an interest-free or low-interest time period for two to six months. Let’s say you get an interest-free time period of three months after you transfer the balance from one of your credit cards to the balance transfer credit. The buffer period allows the borrower three months to settle their debts and avoid any additional interest.

Personal loans are a different option for debt consolidation. You could pay off your debts using this loan amount, then repay the personal loan in regular monthly installments. In this instance, the bank or any NBFC lender will charge a fixed interest rate on the principal. If you have pending credit card debt , it’s better to avail the balance transfer program provided by different card issuers . This will allow you to enjoy two to six months interest-free time (or low-interest) to repay your credit cards debts.

Don’t have enough money?

In some instances, you might find yourself in an emergency situation in which you need money urgently but don’t have enough liquid funds. In this case you can choose to use your credit card or you can also get a personal loan instantly credited to your bank account. You will be charged an additional fee for cash withdrawals made by credit card. This means that you’ll have to pay the interest from cash withdrawals as quickly as possible, even if the card bill is fully paid.

It is more beneficial to apply for a personal loans, which are almost always approved and disbursed in a matter of minutes, rather than withdrawing cash using a card when you require it the most.

Quick Comparison

Below is a table which outlines the different aspects and similarities between personal loans and credit cards.

Credit Cards Personal Credit
Type of Loan Unsecured credit line (certain secured credit card are also available to FDs). Unsecured installments loans
Lending For a Purpose Credit cards can be used at any online/offline merchant that accepts network credit cards. Any purpose (purposed should not be mentioned in application).
Ease of Approval The criteria for income-based eligibility are generally more strict. Simple approvals (sometimes even with no credit history).
Interest Rate About 3% to 4% per month (or 40%-45 percent annually). Between 10 and 15% per annum.
Application Procedure and Documentation Application processing takes a longer time and more documents are needed. Sometimes, approval can be instant and requires less time.
Loan Amount Suitable for daily spends and other small and mid-sized purchases. It is suitable for big and mid-sized purchases.
Loan Tenure No set tenure A pre-determined loan term
Consolidation of debts that are pending Best for consolidating credit card balance transfer credit cards An ideal option to consolidate outstanding debts is to consolidate credit card debt.
Emergency Usage A very high rate of interest of 3 to 4% per month applicable even if the bill is paid in full on or before the payment due date. A comparatively lower interest rate of between 10 and 15% per year is in effect.


Credit cards and personal loans are both extremely useful financial products. Each has its particular advantages in specific usage circumstances. For example, a credit card can be useful when it comes to daily purchases and small to medium-size transactions, or sometimes even to make big-ticket purchases using EMIs. Personal loans, on the other hand is ideal if you need cash quickly or you are planning to purchase a big-ticket item.

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