Credit Card Vs Personal Loan: Compare Benefits, Interest Rates And Other Features

Credit cards and personal loans are common borrowing options for individuals who need quick access to funds. While credit cards are preferred for their flexibility, personal loans have more structured repayment terms. Both have different purposes and benefits, depending on one’s financial needs.

Understanding these differences could be critical to selecting the right option as per your financial needs.

A convenient digital payment option, credit cards allow users to borrow funds up to a certain limit for purchases or cash advances. One of the top features of credit cards is the grace period offered by the banks. If the borrowers pay their balance within the stipulated time, they don’t have to bear interest charges. Credit card purchases also come with reward points, which can later be turned into gifts or vouchers for shopping and travel. Some credit cards also offer exclusive perks such as airport lounge access, priority check-in for flights, cashback on purchases and attractive discounts.

A personal loan is an unsecured loan provided by banks or financial institutions, typically for various personal expenses. In India, some lenders offer personal loans up to Rs 50 lakh, depending on the borrower’s credit history, income source and financial stability. Unlike credit cards, personal loans do not come with reward points or discounts. However, some lenders may offer the loan at lower interest rates to certain borrowers, depending on their credit history and relationship with the bank.

The maximum limit for credit cards is decided by the banks based on the borrower's ability to pay, credit score, income and other factors. While the Reserve Bank of India has not set an upper limit for credit card purchases, typically, they are capped at twice the monthly income of the borrower.

Like credit cards, personal loan eligibility is also determined by various factors such as the borrower’s credit score, terms with the bank, income, etc. Borrowers with improved credit history may also be able to secure loans at lower repayment rates. For an upper limit on personal loans, banks also consider factors such as the borrower’s job stability and the employer’s reputation. Some lenders, such as the Punjab National Bank, also use a 15x cap on maximum loan eligibility. Based on this, the maximum loan can be provided at 15x the monthly salary of the borrower. However, many lenders offer personal loans up to Rs 50 lakh.

Different lenders offer different interest rates for credit card funds. Credit card interest rates can vary from 2.4% to 3.8% per month. The annual interest rates on credit cards offered by various banks can range from 30% to 48%. In the case of credit cards, the interest amount is charged only on the total outstanding instead of the approved limit.

Personal loan interest rates can start from 10% per annum and can go up to 24%, depending on the lender’s policy. The interest amount depends on the credit score and income of the borrower. Many lenders also offer lower interest rates to personal loan applicants with higher credit scores. The interest rate can also vary depending on the tenure and the amount you borrow. However, unlike credit cards, the interest is charged on the entire amount for the pre-defined repayment tenure.

To conclude, both credit cards and personal loans come with their benefits and limitations. Choosing the right borrowing option should be based on your financial needs and a thorough evaluation of interest rates, fees and other terms and conditions.