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Credit Card-Linked Loan vs. Personal Loan: Which Is Better?

Adhil Shetty
·3-min read

Q: Hi Adhil. My bank is offering me a credit card-linked loan, but I’m also interested in a personal loan. Which one, according to you, is a better loan option? Aniket

Ans: Hi, Aniket. You need to carefully consider a few important things before making an informed choice between a credit card-linked pre-approved loan and a personal loan.

The first thing you need to focus on is your exact loan requirement. You should ideally take a loan only when absolutely required and also ensure you do not over-borrow. Once you’re clear about your actual financing requirement, check whether the credit card-linked preapproved loan can meet that requirement. Personal loans typically offer a higher loan quantum than a credit card-linked loan but they could come with a longer repayment tenure too.

Next comes the interest rate comparison. Currently banks are offering personal loans starting at 8.9%-14% p.a. and the rates could go up to 24%-29% p.a. On the other hand, the interest rates of credit card-linked loans usually differ from issuer to issuer, but tend to be slightly higher than personal loans. As such, you’ll be well-advised to compare the applicable interest rates of both the financing facilities based on your requirements and eligibility to figure out which one works better for you. It’s also important to carefully compare the features of both these loan products in terms of the processing fee, tenure range, late payment penalties, etc.

You should also focus on the fact that many credit card-linked loans are usually offered against the credit limit of your credit card. Meaning, your credit limit will get blocked to the extent of your loan amount and will free up as you clear the EMIs, which will get added to your credit card outstanding during every billing cycle. You should ensure that the reduced credit limit will be sufficient for your other credit card spending requirements. It’s better if your preapproved loan is not linked with your card’s credit limit, however, such products could be a rarity.

The other super-critical considerations should be your income and credit score. If you’re planning to go for a personal loan because you feel the credit card-linked loan you’ve been offered is more expensive, keep in mind that the lowest advertised rates for a personal loan are usually offered to those with stable income and a credit score above 750-800. If your credit score is below par, the applicable interest rate for a personal loan could be higher than the rate of a credit card-linked loan.

That being said, a preapproved credit card-linked loan is likely to involve zero documentation and, hence, a quick loan disbursal. A personal loan might take a few days to get sanctioned if it’s not pre-approved. So, check whether you’re also eligible for a preapproved personal loan or not. It will be worthwhile to point out here that all pre-approved loans are only offered to select customers after the bank carefully evaluates their income and creditworthiness and usually guarantee speedy disbursals.

Lastly, and most importantly, whichever loan you end up taking, ensure you have a thorough repayment plan so that you could clear your debts in full on time and avoid interest penalties and a damaged credit score.

Have a question about personal finance? Ping me on Twitter at @adhilshetty with the hashtag #AskAdhil. The writer is CEO, BankBazaar.com, an online marketplace for loans and credit cards. Image: mrsiraphol/Freepik

Need help in calculating your personal loan EMIs? Use BankBazaar’s Easy EMI Calculator.