Personal funding has varied forms. Amongst them, credit cards and loans are worth noting. Remember, when assessing the difference between credit cards and loans, there are various parameters to be considered. All these parameters have been touched upon in this article.
Before reading further, it is crucial to understand both loan and credit card terminologies. Note that they vary in terms of their definition and objectives.
Understanding loans
The loan is an instrument available to you as financial aid by borrowers. Lenders provide you with a predefined loan amount with the assurance of repaying the proceed after a specific time period. A loan is provided depending on the understanding that the amount, along with the agreed interest constituent, must be returned to the lender within the promised period. This loan repayment must be made in the form of monthly instalments.
Once the whole amount that you owe is repaid in the form of instalments, the loan must be closed. And no additional loan proceeds will be provided to you by the lender till you opt for another loan.
Time frame
All of you must be aware of the loan transactions and completion date. It is not uncommon for the loans to go over the long-term period, which can amount to many years. The amount extended under this loan is decided by keeping in mind your credibility and need. Credibility is simply the understanding of the bank about how likely you will be able to make the loan repayment.
Additional Reading: ICICI credit card bill payment
What are the types of loans available in the market?
Loans are available in the listed 2 forms –
Secured loans
Money here is extended to you as you offer some collateral or security. This ordinarily is the same asset that has been used to get the loan. For example, a home loan is secured by the home you avail, a car loan is secured by the car you avail, etc. If you miss repaying your financial obligation on time, your lender may repossess or home or car, respectively, to sell them and use the acquired proceeds to cover up the remaining loan EMI that you failed to repay.
Unsecured loans
Such loans are not backed by any kind of security. They ordinarily are approved depending on just your credit history. Unsecured loans generally offer a lower loan proceed and have a higher rate of interest linked to them than the secured loan option. However, this can differ from lender to lender or bank to bank.
Understanding the credit card
A credit card is crucially the money you do not yet have. Just think of this as an interest-free cash advance you can use for making repayments only. This provides you with higher flexible funding as this allows you to access money as per your requirement. This said, there are zero limits that are imposed on the proceeds of money you can spend; however, as there’s a credit card limit assigned to each one of you, it is not allowed to exceed this assigned limit. In case you surpass the assigned credit card limit, then an over-limit charge may be levied. For instance, suppose you are using an ICICI credit card that provides you with a credit card limit of Rs 2 lakh. This card assures you to provide high ICICI credit card reward points on every online transaction. Enticed by this offer, you make a higher purchase of, say, Rs 2.10 lakh, i.e., over your credit card limit. Now, when your ICICI credit card bill payment statement is out, you will be charged an over-limit charge as you went over your credit card limit. Going over your credit card limit also negatively impacts your credit score as your CUR (credit utilization ratio) increases. An increment in your CUR makes the credit bureaus view you as a credit-hungry individual, which in turn makes them lower your credit score.
Expenditures incurred
Lines of credit are linked to a higher rate of interest than loans. However, note that on a credit card, no finance charges may be charged on using the credit card limit if you make the repayment of the outstanding bill on time by the due date. In case you do not pay the full credit card due, you will be charged finance charges of as high as 52 per cent p.a. You may also be charged a late payment fee if you miss out on making the minimum amount due repayment by the due date.
Limits imposed
The limit of credit card gets reinstated once you make the repayment of the borrowed limit on time. As this credit card limit can be used in totality or in parts on a repeated basis, it permits the versatile borrowing of money.
Credit card and personal loan
Selecting between a credit card and a personal loan might be tricky. Here’s a distinction table –
| Consideration area | Credit card | Personal loan |
| Function | Credit cards assist cover small and big purchases and can be utilized to expense business and personal needs. | Such loans are utilized to cover a wide range of requirements. These involve financing medical expenditures, home renovation, paying for children’s education and wedding. |
| Rate of interest | The applicable interest rates are a little higher than your personal loan. However, note that finance charges are only charged if you fail to make the repayment of your credit card dues in full on time. | Competitive rate of interest applies in contrary credit cards. |
| Time period | The free interest-free duration ordinarily is up to 55 days. | Personal loans have a repayment tenure of up to 5 years. However, few lenders may allow a higher repayment tenure of 6 to 7 years. |
| Borrowing method | Such cards can be taken up online or at the credit card counter store. | You can get the loan by placing an application with the lenders and providing the required documents. |
| Disbursement method | The loan amount is repaid to the issuer every time you swipe the card. Note that upon receiving the credit card statement, payment must be paid in full by the due date, mostly every month. | The loan amount is paid in the lumpsum form to you. Payment can be made in small EMI spread across the repayment tenure of usually up to 5 years. |
| Limits imposed | Credit card issuers impose a predefined credit card limit every month. | The amount is extended to you based on your income proof. |
| Loan repayment | As a credit card user, you must make the payment of the bill due towards the end of every credit cycle. | You must make the repayment in the form of EMI for the outlined repayment tenure. |
