The Indian credit market has been flourishing remarkably in the past few years, especially when it comes to short term unsecured credits like personal loans and credit cards. Both the sectors attained growth rates in double-digits in the Financial Year 2018 – 19, with 26% year-on-year growth in personal loans and 27% in credit cards.
Credit cards particularly gained traction after demonetisation in 2017. It was followed by a slew of measures from the Indian credit market, which bolstered its structure and protocols allowing borrowers more convenience. In the Financial Year 2018 – 19, amount of transactions using credit cards soared to Rs. 6.09 Crore from Rs. 4.6 Crore in the previous year. Online credit cards have had a major role to play in its growth as well.
Regardless, when it comes to credit cards or personal loans, individuals find it difficult to opt for one, as both these credits share some essential features such as no end-use restriction, collateral-free disbursement, etc.
Difference between a credit card and a personal loan
However, these two facilities also possess some intrinsic distinctions and are suitable for individual needs. These are –
Revolving line of credit
Credit cards are a prominent mode of loan for its feature of a revolving line of credit. In simpler terms, the limit on an online credit card renews every time on payment, until delinquencies are noted; in which case lenders might decide to terminate your card.
In the case of personal loans, revolving line of credit facility is not available. You cannot renew your personal loan if you exhaust the loan quantum or the repayment tenor is over, whichever comes first. You have to apply for a separate personal loan on account of fund exhaustion or tenor maturity.
Credit cards usually have a lower credit quantum compared to personal loans. The facilities are designed to meet an individual set of expenses.
You can use a credit card to meet expenses which recur every month or to meet smaller costs. Personal loans are designed to meet larger unforeseen expenses.
Credit utilisation ratio
Although lenders do not specify any utilisation ratio when you avail a credit card, financial experts suggest it is beneficial if you can maintain your utilisation ratio below 30%. A primary reason for this is when you consistently use more than 30% of your limit it represents you as a credit hungry individual. One of the ways you can manage your utilisation ratio is by availing another credit card.
In case of offline or online credit cards, you need to repay your dues every month, within a specified grace period. This period is a buffer of an interest free period of a few days from the day of your bill statement reception. You can repay anytime within such period, defaulting which, the lender will levy a high interest rate on your due. One of the ways how you can use your credit card to improve your credit score by repaying in full before time.
In the case of personal loans, repayment tenors usually extend from 12 to 60 months. The tenor will be determined during the time of loan approval. You can choose to repay anytime within such period.
When you use an offline or online credit card, you earn reward points on it which you can later redeem against various offers. One of the most popular cards for rewards is the Bajaj Finserv RBL Bank SuperCard, which facilitates multiple reward programmes for borrowers.
In the case of personal loans, there are no such reward programmes.
These are a few distinguishing features of credit cards and personal loans. Other than these, you can also avail credit card loan against the unutilised amount of your card’s limit.
A credit card, like any other credit facility, can bring in multiple benefits if you know how to use it wisely.
Personal loans, on the other hand, also come with a separate set of benefits which you can derive from its high-value credit.
Therefore, you should choose which facility suits your financial obligations when deciding for either of the above-mentioned credit facilities.