Usually a loan available on a fixed rate of interest, a personal loan is sanctioned for a given tenure of between 12 and 60 months payable via equal monthly instalments or EMIs that include the principal as well as the interest component. Personal loan for salaried individuals is more easily approved than those for self-employed people.
A credit card loan, on the other hand, is generally referred to as revolving debt. This is because the borrowed amount is dependent on the funds spent on the card and the balance that is left at the end of your monthly billing cycle.
Is taking a loan to get rid of credit card bills a good decision?
Yes, taking a Personal Loan to pay off your Credit Card debts are always considered to be a good decision. Credit card interest rates are huge when you compare to Personal loans. Even one delayed payments of your credit card will result to payment of high interest.
The Personal Loan interests are between with 10.99%-16% which depends on your profile whereas the credit card overdue will lead you to pay interest around 2–3% per month which will be 30–36% per annum.
If you’re struggling to afford credit card payments, taking out a personal loan with a lower interest rate and using it to pay off the credit card balance in full may be a good option.
A debt consolidation loan with a low interest rate could mean owing less per month, which can help you make loan payments on time. A lower interest rate may also leave you with more money to put toward the loan balance, allowing you to pay it off earlier.
But before you use a personal loan to pay off credit card debt, consider not only the interest rate you receive, but also the repayment term lenders offer. Choosing a longer repayment term than you would have needed to pay off the original credit card debt could cost you more in interest. If a longer repayment term helps you afford to repay the debt, though, it could protect your credit from the effect of missed payments, making the choice worthwhile.
Is Personal Loan Debt Better Than Credit Card Debt?
Personal loans and credit cards can impact your credit score positively if you make payments on time and negatively if you don’t. When you use credit cards, it’s best to keep your total balance below 30% of your total credit limit, and the lower the better. Maintaining low balances will reduce your credit utilization ratio, which is the second most important factor in your credit score after payment history.
But there are some significant differences between personal loans and credit card debt. Personal loans are a type of installment debt, which means you’ll make the same size payment each month without the flexibility to pay less. Personal loans also often come with origination fees, but their interest rates may be lower than what you’d receive on credit cards.
By contrast, credit card debt is revolving debt. You can carry a balance and make smaller monthly payments as your budget dictates, as long as you pay the minimum your issuer requires each month. But credit cards charge late fees and, potentially, annual fees, along with higher interest rates than most personal loans. Plus, they may encourage you to spend more, knowing you have a credit limit you can charge up to.
Should I go for a loan on credit card or take a personal loan?
If you are considering a loan then opting for a Personal loan is advisable because Credit Card’s interest rates are huge when compared to Personal loans. Credit Card Interest rates are between 2.5 to 3 % per month which comes out to be 30–36% per annum, whereas Personal Loans are available from rates starting at 10.99% per annum at present.
However, if you take a Credit Card and always pay the Full Due amount, on or before due date, then a Credit Card offers 20–50 days worth of free credit period. The interest triggers if you make a partial payment of the Full due amount or just pay the Minimum Due.
Should you take an additional loan to pay off your credit card dues?
To get out of such debt, clearly availing a fresh loan sounds like a great idea, but should you go for it? Loans such as personal loans, gold loans, etc. have a lower interest rate than the finance charges of credit cards. Experts say one can take a fresh loan at a lower interest rate. Consider personal loans, home loan top-up, or a gold loan that comes with lower rates for a longer tenure.
Even though one can explore the option of taking a personal loan when deep down in credit card debt, it is not usually advised.
Generally, credit cards levy charges ranging between 36 per cent to 48 per cent, whereas interest on personal loans ranges from 11 per cent to 24 per cent. The interest rate, however, depends on the borrower’s credit score, monthly income, employer’s profile among other eligibility criteria.
Along with the lower interest rates, personal loans come with a tenure that goes up to 5 years, thus, reducing the financial strain on the borrower.
Other than taking a personal loan, you can also opt for a top-up loan. However, this will be possible only if you have an existing home loan. With an existing home loan, you can avail of a top-up loan at even lower rates for a longer tenure.
Once you apply for a top-up loan, the lender conducts due diligence on the property and then your top-up loan is approved. With this top-up loan amount, you can pay off your high interest charging credit card dues. According to experts, you can easily get top-up loan approval from your existing borrower, if you have been regular with your home loan for more than 2 years successfully.
Credit Card dues to EMIs
Credit cards EMIs are quite similar to other loan EMIs. You pay a portion of the principal loan amount along with interest each month and thus, clear off your dues over a period of time.
- Credit card issuers may allow card holders to convert their dues into a loan and repay through EMIs, both on new purchases as well as the existing balance.
- The option may be for purchases made during a certain period or from specified stores. For conversion, the purchase value should be above the minimum limit.
- The decision to choose the EMI option has to be made at the time of purchase or within a specified period. It can be done via a call or an e-mail sent to the issuer.
- The card holder also needs to choose the tenure of the loan from the options available in the scheme. This period varies from three months to a year.
- The interest that is payable on the loan is specified by the issuer. Usually it is lower than the interest charged on the revolving credit facility.
- The card holder is charged a processing fee for the conversion. There may also be a foreclosure fee in case the loan is sought to be prepaid.
Factors to consider before converting your Credit Card dues to EMIs
Credit card issuers charge an interest rate on conversion of credit card dues to EMI. This can range anywhere between 12–20% per annum. However, the interest rate on EMIs can be significantly lower than the rate charged on late payment of credit card dues, which can go up to as high as 45% p.a.
Processing fee and service tax:
Conversion of credit card dues to EMIs may attract processing fee and service tax on the interest amount of EMI.
Reduced credit limit:
Unlike the usual repayment of credit card dues, converting your credit dues into EMIs will block the outstanding amount against the credit limit on your card for comparatively longer tenure depending on tenure of your debt.
Banks penalize foreclosure of outstanding loan by charging a certain percentage on the outstanding amount.
Absence of discounts:
Availing a product through credit card EMI option may mean foregoing the discounts that are usually offered on cash transactions. This will act as another additional cost of availing credit card EMIs.
Does the high utilization of Credit Cards hurt our loan eligibility?
Usually, when you apply for a loan, the lender looks at various details to check if you have the capability to repay. Banks will also try to analyse the percentage of risk involved in giving you a loan. The factors considered to assess repayment capability include salary, age and credit history.
When it comes to credit history, your credit card plays a huge role. If your credit history is good, you will be considered a ‘good risk’ and will be granted a loan. If your credit history is bad i.e utilizing a high amount or maximum credit limit can have serious consequences. It is wise to use only up-to 30% of the sanction limits and pay within the credit cycle. Under no circumstances should you max out your credit limits.
Credit Card Loan vs. Personal Loan
From an overall perspective, both credit card and personal loan seem one and the same. Whilst you can borrow funds and make repayments, the differentiator is in the interest rates charged for the privilege.
Personal loan vs credit card loan – which one is better? This is indeed a difficult one to call. A lot depends on your need, perspective and circumstance to determine a clear winner.