Credit card loan or bank personal loan, which is better to avail?

Money can be needed anytime for any reason. Years ago, people had to rely on private financiers or relatives to fund to their sudden or unexpected monetary need. But now, after various economic reforms and liberalization of banks, availing a loan for those who maintain good financial history has become much easier. Just a phone call and money gets credited to your account within 2-3 days. Yes, it is this simple today to get credit card loans. Though credit card loans are easier to get, they come at a higher cost than personal loans from banks. So you need to know clearly when to take a credit card loan or a personal loan. Even if the credit card company charges you the same rate of interest as that of personal loan, the cost for servicing credit card loan is higher. Along with processing fees and pre-closure charges, credit card companies also charge service tax on the interest you pay on your loan every month, which is 15 per cent currently (service tax@14%+ Swach Bharat Cess@ 0.5%+ Krishi Klyan Cess @ 0 .5%). After GST becomes implemented post 1st July 2017, service tax and other cess are expected to rise.

Even if costs like interest rate, pre-closure charges and loan processing fees remain the same for credit card loan and bank personal loan, interest cost of credit card loan become 15 per cent more because of service tax.

For example, if you take a personal loan of Rs. 1 lakh from a bank at 14 per cent interest for 24 months, then your first month instalment will be Rs. 4,802, in which interest component will be Rs. 1,166.66 and principal repayment will be Rs. 3635.33. If you take the same loan on your credit card at the same interest rate, in the first month you have to pay Rs. 4,976.99 which is Rs. 175 more than what you pay on a bank loan. This is because of the service tax of Rs. 175 on interest of Rs. 1,166.66. This service tax is also applicable when you convert your purchases on credit card to equated monthly instalment (EMI).

However, there are some instances, where credit card loans are preferred over bank personal loans. If the amount you are opting for is less (less than Rs. 50,000) and the tenure you want is less than 1 year, then credit card loans become more useful (even with higher cost) because banks generally do not offer personal loans below Rs. 50,000 and for less than one year.

Credit cards even offer loans even for six months and for small amounts as low as Rs. 10,000. If your requirement for funds is for a short term and you think you can repay it faster, then it is worth going for a credit card loan.