Personal Loan vs Credit Card: Which Is Better in India?

When it comes to managing short-term financial needs in India, two popular options often come to mind: personal loans and credit cards. Both are unsecured forms of credit, easily accessible, and widely used by salaried and self-employed individuals. However, choosing between a personal loan and a credit card can significantly impact your finances, interest burden, and credit score.

This in-depth guide compares personal loans and credit cards across interest rates, repayment flexibility, eligibility, use cases, and long-term financial impact to help you decide which option is better for your needs.

Understanding Personal Loans

A personal loan is an unsecured loan provided by banks or NBFCs for a fixed tenure, usually ranging from 12 to 60 months. It comes with a fixed EMI that includes both principal and interest. Once approved, the loan amount is disbursed directly into your bank account.

Common Uses of Personal Loans

• Medical emergencies
• Wedding expenses
• Travel and vacations
• Home renovation
• Debt consolidation

Understanding Credit Cards

A credit card is a revolving line of credit offered by banks and financial institutions. You can borrow up to a predefined credit limit and repay either the full amount or the minimum due every month. Interest is charged only if the outstanding balance is not paid in full.

Common Uses of Credit Cards

• Daily expenses and shopping
• Online payments and subscriptions
• Emergency short-term expenses
• Reward points and cashback benefits

Key Differences Between Personal Loan and Credit Card

Interest Rate Comparison

Interest rates are one of the biggest deciding factors. Personal loans generally offer much lower interest rates compared to credit cards.

For example, if you borrow ₹2 lakh:

• Personal Loan at 14%: EMI ≈ ₹9,600 for 24 months
• Credit Card at 36%: Interest compounds monthly if unpaid

If you only pay the minimum due on a credit card, the interest burden can become extremely high over time.

Repayment Flexibility

Credit cards offer more flexibility in repayment, allowing you to pay the minimum amount due. However, this flexibility comes at a cost — very high interest rates.

Personal loans require strict EMI payments, which helps build financial discipline and avoids long-term debt traps.

Impact on Credit Score

Personal Loan

• Timely EMIs improve credit score
• Missed EMIs negatively affect score
• Shows long-term repayment discipline

Credit Card

• High utilization ratio can reduce score
• Minimum payments increase debt burden
• Late payments impact score heavily

From a credit score perspective, personal loans are safer if managed properly.

Eligibility Criteria Comparison

Personal Loan Eligibility

• Minimum income (₹15,000–₹25,000)
• Stable employment
• Credit score above 700

Credit Card Eligibility

• Lower income requirement
• Easier approval for salaried individuals
• Entry-level cards available

Credit cards are easier to obtain for first-time borrowers, while personal loans require stronger financial profiles.

Fees and Charges

Personal Loan Charges

• Processing fee (1%–3%)
• Prepayment charges
• Late EMI penalties

Credit Card Charges

• Annual and renewal fees
• Late payment fees
• Cash withdrawal charges
• GST on interest and fees

When Should You Choose a Personal Loan?

A personal loan is better when:

• You need a large amount of money
• You want predictable EMIs
• You prefer lower interest rates
• You are consolidating debt

When Should You Choose a Credit Card?

A credit card is suitable when:

• You need short-term liquidity
• You can repay the full amount within 30–45 days
• You want rewards or cashback
• The expense amount is small

Personal Loan vs Credit Card for Emergencies

In emergencies:

• Credit cards provide instant access
• Personal loans take 1–3 days for disbursal

For immediate emergencies, credit cards may be useful, but for planned expenses, personal loans are financially healthier.

Debt Trap Risk

Credit cards pose a higher risk of debt trap due to:

• Minimum payment option
• High compound interest
• Easy reusability of credit limit

Personal loans, with fixed tenure and EMIs, reduce the risk of endless debt.

Case Study: Which Option Is Better?

Example: Ramesh needs ₹3 lakh for medical expenses.

• Using credit card: Interest ~36%, heavy monthly burden
• Using personal loan: Interest ~13%, fixed EMI

Result: Personal loan saves nearly ₹1 lakh in interest over two years.

FAQs: Personal Loan vs Credit Card

Q1. Which is cheaper, personal loan or credit card?
Personal loans are significantly cheaper due to lower interest rates.

Q2. Can I convert credit card dues into EMI?
Yes, many banks offer EMI conversion, but interest rates remain high.

Q3. Which improves credit score faster?
Both can improve score if used responsibly, but personal loans show better repayment discipline.

Q4. Is credit card safer for short-term expenses?
Yes, if you repay the full amount before the due date.

Q5. Can I use both together?
Yes, but ensure overall debt remains manageable.

Conclusion

Both personal loans and credit cards serve important financial purposes, but they are designed for different needs. Personal loans are better for large expenses, long-term repayment, and lower interest costs. Credit cards are suitable for short-term expenses and convenience, provided you repay on time.

Understanding your financial needs, repayment capacity, and discipline will help you choose the right option. Making an informed decision today can save you from financial stress tomorrow.