Credit card loans offer ongoing access to specified amounts, while personal loans lend a lump sum of money upfront to the borrowers.
Credit Card loans and Personal loans are both types of unsecured debt with flexible payment methods, but they still operate differently.
Credit Card loans’ monthly repayment depends on how much credit the cardholder is using, whereas personal loans come with a fixed repayment schedule that requires borrowers to make monthly installment payments.
Credit Card Loan
A “credit card loan” or “loan on a credit card” refers to the money the cardholder borrows from the credit card company against their credit card limit and repays it over time with interest.
A credit card loan is a type of revolving credit, so a cardholder can borrow and repay as needed.
Personal Loan
Personal Loan refers to the money the cardholders borrow in a lump sum with fixed repayment terms and interest rates.
A personal loan is a type of Instalment loan, so a cardholder has to repay in regular installments with interest over a set period.
Documents Needed to Apply for Credit Card Loan vs. Personal Loan
Preparing the necessary documents in advance can enhance your approval chances, allowing you to receive your funds more quickly.
Documents for Credit Card Loan
To apply for a credit card loan, the required documents are:
| Personal Information | Financial Information |
|---|---|
| Full Legal Name – name appeared on passport or driver’s license. | Employment Status – unemployed/ employed / self – employed |
| Date of Birth | Annual Gross Income ( income before taxes) |
| Current Address | Employer’s address |
| Social Security Number | Employer’s phone number |
| Email Address | Housing status – own house/ rented |
| Phone Number | Monthly Housing Payment ( if applicable) |
| – | Bank Account Information |
| – | Permission to pull your credit report |
When to Use Credit Card Loan?
- You can use the credit card loan to plan your vacation / trip.
- You can use credit card loans to cover any unexpected bills such as forced relocation, medical bills, etc.
- You can use the credit card loans to take advantage of a 0% interest opportunity.
Documents for Personal Loan
- Proof of income and employment status, like a pay stub, tax return or W-2.
- Current address -If you have lived at your current address for less than two years, some lenders may ask you to provide your previous address.
- Proof of identity, like a government-issued ID.
- Social Security or Individual Taxpayer Identification number.
- Your creditor information, including existing outstanding loan amounts and current monthly payments.
- Proof of address, like a utility bill or mortgage statement.
- Proof of additional income such as retirement, alimony or child support.
NOTE: In addition to the details mentioned above, some credit card companies require additional information based on their eligibility criteria. Therefore, it’s advisable to check the bank’s official website for more specific information.
When to Use Personal Loan?
- You can use a personal loan for debt consolidation or larger purchases.
- You can use a personal loan for important expenses such as wedding costs, home renovations,etc.
Approval Process – Credit Card Loan vs. Personal Loan
Credit card loans and personal loans offer different borrowing options. Credit card loans rely on your existing credit limit, while personal loans provide lump sums with fixed repayment terms.
Credit Card Loan
The loan approval process usually begins by submitting the application form and providing information such as income, credit history, and employment status. Then, the credit card company collects the required documents from the cardholder and starts with the document verification step.
Lenders evaluate your creditworthiness by considering your credit score, debt-to-income ratio (DTI), and overall financial health. A higher credit score and a lower DTI indicate better creditworthiness.
Personal Loan
Most lenders start with an online application process that requires your income, credit history, and bank account information for a quote. To finalize your offer, you’ll need a hard credit check and proof of recent paychecks.
If you have excellent credit and low debt, you could have higher borrowing limits with repayment terms of up to seven years. If your credit is fair or poor, you may face higher rates and borrowing limits, and you might need to take extra steps to improve your chances of approval.
Affect On Credit Score – Credit Card Loan vs. Personal Loan
Credit card loans and personal loans can have a negative or positive impact on credit scores, depending upon the usage.
When you apply for a personal loan, the lender performs a hard inquiry on your credit history, which may temporarily lower your credit score by a few points. This effect usually lasts only a few months.
When you apply for a credit card loan, it impacts your credit utilization ratio, which can impact your credit score if not maintained properly.
To maintain a good credit score, pay your bills on time, as your payment history significantly impacts your score. Positive payments can boost your score, while missed payments can decrease it and affect your score for up to seven years.
Credit Card Loan vs. Personal Loan
| Serial Number | Fees | Amount | Repayment Terms |
|---|---|---|---|
| Credit Card Loan | Annual Fee, Late payment fee, Foreign transaction fee ( if applicable ), Balance transfer fee, Cash advance fee , etc. | Up to $10,000 | Minimum monthly payments to payment of entire account balance |
| Personal Loan | Origination fee, Prepayment penalty, Late payment fee. | $1,000 – $100,000 | Regular monthly payments of the same amount |
Which One is the Best – Credit Card Loan vs. Personal Loan?
Choosing between a personal loan and a credit card loan depends on your financial habits and needs. Personal loans offer fixed payments and lower interest rates, while credit cards provide flexibility for smaller, recurring expenses.
One should choose a personal loan if:
- You prefer consistent payments that won’t change as long as you miss the payment.
- You are concerned about spending habits that arise with credit cards – ( as personal loans require applying for more funds once they are exhausted.)
- You want to have a lower interest rate, as the average APR for new credit cards is around 18.68% – 24.72%.
One should choose a credit card loan if:
- You want to cover your small, recurring expenses.
- You want to avoid interest charges by paying off your debt before the due date.
- You want to make minimum payments on your credit card, but it may lead to paying back more than double the amount borrowed in interest.
Other Options for Borrowing Money
Exploring alternative financing options can help manage expenses without relying on traditional credit cards.
Here are some flexible solutions to consider for your financial needs:
Buy Now, Pay Later
Many retailers offer buy now, pay later plans that split the total into smaller, often interest-free installments, even for those with poor or no credit.
Home Equity Loans and HELOCs
If you own a home with sufficient equity, you might qualify for a home equity loan or a HELOC. A home equity loan provides a lump sum, while a HELOC offers a credit line you can draw from as needed.
Personal Lines of Credit
A personal line of credit functions like a credit card, allowing you to access funds anytime within your credit limit.
Payday Alternative Loans (PALs)
Some banks and credit unions offer PALs, usually between $200 and $1,000, with more reasonable prices.
Conclusion
Personal loans and credit cards make borrowing money easy, but both can lead to credit problems if you can’t repay. Be sure to compare interest rates, fees, and terms before choosing, as they can vary widely among lenders.
Frequently Asked Questions
Is a credit card loan better than a personal loan?
A personal loan is generally more suitable than a credit card for large, one-time expenses or debt consolidation due to potentially lower interest rates and fixed repayment terms; meanwhile, credit cards are better for everyday spending and short-term financing.
Does a personal loan hurt your credit?
Yes, a personal loan may temporarily hurt your credit score due to a hard inquiry, but responsible repayment can improve it in the long term.
What builds credit faster personal loans or credit cards?
Both credit cards and personal loans can help you build credit when you make on-time payments. Using a personal loan to pay off credit card debt can lower your credit utilization ratio, boosting your credit score.