Loan on credit card vs personal loan: Which one should you opt for?
Getting a credit card loan is very easy nowadays. Banks keep on calling customers with good repayment profile to give them loan against their credit card limit. Many people get into the trap and take credit card loans, as it is easily available as compared to personal loan from banks, which require some documentation and a good credit score. Credit card loans come at a higher overall cost compared to bank personal loans even if the interest rate on both the loans remains the same. Along with processing fees and pre-closure charges, credit card loans come with an additional cost of goods and services tax (GST).
If you go through your credit card statement, you can see that banks charge GST of 18 per cent on the interest amount/finance charges. It means the interest cost for credit card loans is at least 18 per cent higher than bank personal loans even if they charge the same rate of interest.
For example, if you take a personal loan of Rs. 100,000 from a bank at 12 per cent interest rate for 24 months, then your first-month installment will be Rs 4,707, in which interest component will be Rs. 1,000 and principal repayment will be Rs. 3,707.
If you take the same loan on your credit card at the same interest rate, in the first month you have to pay Rs. 4,887, which is Rs. 180 more than what you pay on a bank loan. This is because of the GST of 18 per cent that the credit card companies charge on interest component.
In some cases, we convert our large credit card purchases to EMI. In this case also you have to pay GST on the interest amount. So it is always advisable to spend that much amount through your credit card, which you can repay within the due date. If there is some amount due on your credit card, which you are not able to pay within the due date, then you should not carry it forward to the next month as credit cards charge interest rate between 24-48 per cent per year on the outstanding amount. It is advisable that you take a personal loan and pay all your credit card outstanding which is there for more than one month.
