Most Indians interchange credit card and personal loans without considering the differences in their functionality. They both imply lending money without any promise of an asset, and both are reflected in your credit report. However, similarities are where the comparison ends. Knowing the differences and overlaps may enable you to make far more informed borrowing choices.
How RBI Classifies Credit Cards and Personal Loans
The Reserve Bank of India is very different in handling these two products. Credit cards are a revolving credit that is borrowed, repaid and borrowed again within a given limit. Personal loans are categorized as term loans, a set sum given out in one lump sum and repaid in a set period using the same amount of instalment each month. Both of these are under unsecured lending, i.e. no collateral is needed. They are subject to the Master Direction on credit card and debit card issuance 2022 of RBI, whereas personal loans are subject to the Fair Practises Code of lenders.
Where They Are Fundamentally Different
Despite both being unsecured, the two products differ considerably in structure and cost:
| Feature | Credit Card | Personal Loan |
| Credit Type | Revolving | Term-based |
| Interest Rate | 24%–48% per annum | 10%–24% per annum |
| Repayment | Flexible monthly | Fixed EMI |
| Tenure | Open-ended | Fixed 1–5 years |
| Disbursement | Credit limit | Lump sum |
The interest rate gap alone makes personal loans considerably cheaper for any borrowing need that extends beyond thirty days.
When Does a Credit Card Act Like a Personal Loan?
It starts to act like a temporary loan on three occasions.
- To start with, once you convert your outstanding balance into a fixed EMI plan, a service available in most of the large banks.
- Your bank provides you with a loan straight on your current credit limit, which is deposited in your bank account in the form of cash.
- Transactions such as drawing cash with the aid of your credit card at the ATM – this is considered a high-cost short-term advance with no interest-free period, and the charges are charged starting on the first day.
EMI on Credit Card vs Personal Loan
The conversion of credit card dues to EMIs is easy but hardly ever economical. The credit card EMI conversions are usually charged at an interest rate of 14% – 24% annum, and processing fees are charged. A new personal loan is usually charged at a cheaper rate, the duration is longer, and it is not subject to any hidden conversion fee. RBI requires that all lenders will publish the Annual Percentage rate in an understandable manner, thus a comparison between the APR and the monthly rate will give a better idea of the actual cost of borrowing.
What Most Indians Get Wrong
One of the worst financial practices is paying the minimum on a credit card. Interest is charged on the total amount of the balance, and not only the unpaid amount. What most borrowers do not understand is that a large credit card limit also qualifies as an exposure to debt when one is taking a personal loan, even when the card is empty. A credit card account that has not paid all the dues is considered as negative in a CIBIL report as a loan that has gone bad.
Conclusion
Both credit cards and personal loans are unsecured borrowing instruments; however, they have different purposes and have highly dissimilar costs. The awareness of how RBI categorizes individual products, the actual cost of EMI conversions and the elimination of the habitual repayment errors will enable all Indian borrowers to playfully employ both instruments much better.
FAQs
What type of loan is a credit card loan?
A Credit Card loan is an unsecured loan that requires no collateral of security. A Personal Loan is an unsecured loan. However, you need to prove your capability to repay it. It is a pre-approved loan, there is no documentation needed to avail of it.
Which is better: credit card or personal loan?
The decision between a credit card loan and a personal loan should be based on your financial circumstances and requirements. A credit card loan is more accessible but comes with higher interest rates, while a personal loan may offer comparatively lower interest rates but can be more difficult to qualify for.
Do credit cards have higher interest than personal loans?
As a rule, credit cards carry a higher interest rate than personal loans. You’ll need to make a minimum payment on a specific date each month, known as the payment due date, which is specified in your credit card statement.
Disclaimer: The information provided on this website is for general informational purposes only and should not be considered financial or legal advice. Please consult with a qualified financial advisor before making any decisions.
