Loan against credit card vs personal loan: 6 key factors to help you choose

When you want to raise a personal loan, you may have the option to raise it against a credit card rather than opting for a conventional personal loan. However, one must make a wise choice between the two options.

Before you jump the gun, make sure that you consider all the key factors. These include whether there is a pre-approved loan, the rate of interest charged by the bank, the total amount required, and your current credit score.  

Loan against card or personal loan: Key factors

1. Pre-approved loan: First of all, you should consider whether the loan is pre-approved or if one has to opt for it. Typically, a loan against a credit card is a pre-approved one, and conversely, a regular personal loan has to be applied for. Therefore, you choose the option that suits you the most.

2. Rate of interest: Another important factor that one must consider is the rate of interest. Generally, a loan against a credit card carries a higher rate of interest. On the other hand, a regular personal loan carries a relatively lower interest rate.

3. Blend of two options: When an applicant already has a pre-approved offer and does not want to let go of it, he can first avail the offer at hand. If the fund requirement is still there, she can then apply for a regular personal loan for the top-up.

4. Usage against the credit limit: Once you take out a loan against your credit card, the limit of your credit card is blocked. If you are set to use your card shortly, you should be careful about availing this option, and instead, can opt for a regular personal loan.

5. Requirement of loan: Sometimes the loan that you need is far more than what is being offered by the bank against your credit card. In that case, it is futile to take it. Instead, one can simply take a regular personal loan.

6. Credit score: One key factor that you should also consider is the credit score. If your credit score is very high, then it is easy to get a personal loan at a lower interest rate. 

What are the 5 C's of loan analysis?

Now, before going ahead with any kind of loan, as a sensible borrower, one should always consider the five C's of loan analysis. These tools help lending institutions make better lending decisions. That is why their understanding will help you plan your borrowing more efficiently.

1. Character: The credit history of a borrower, repayment patterns, and trustworthiness play an extremely important role in loan approvals. This must be kept in mind while applying for any new loan or credit card.
2. Capacity: The borrower's income from salary, debt-to-income ratio, and repayment potential all cumulatively define their capacity. A strong repayment capacity results in supporting one's credit score.
3. Capital: The borrowers' financial investments, savings, overall debt, EMIs, if any, along with a complete financial profile that showcases their commitment towards both their finances and repayment integrity.
4. Collateral: Assets pledged to secure the loan, reducing lender risk. The more valuable the collateral, the easier the loan terms become. This means that if a borrower can pledge a high amount of gold, property, or any other asset, as per the terms of the loan. Then, such collaterals help in making the loan approval seamless.
5. Conditions: External factors such as interest rates, the economy, and the loan objective are also analysed before providing a loan. For example, a loan for education is looked at differently by lenders in comparison with a loan for travelling. 

Furthermore, when the borrower's credit score is less than 700, the applicable interest rate offered to you will not be much different from what is being provided against a credit card. Still, before taking a borrowing decision, consult a certified financial advisor so that the best possible decision can be made. 

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