Credit Card vs Personal Loan: Should You Switch?

When Does a Personal Loan Make Sense?

Credit cards charge 3.5% per month — that's 42% per annum on any outstanding balance. A personal loan typically costs 12-18% per annum. The rate difference alone can save you tens of thousands of rupees in interest. But the math only works under specific conditions:

• Outstanding above ₹50,000: For smaller amounts, the processing fee (1.5-3% of the loan amount) eats into your savings. On a ₹30,000 balance, a 2% fee is ₹600 — the interest saving over 12 months may not justify the effort.
• You can commit to EMIs: A personal loan has fixed EMIs. If you miss one, it hurts your CIBIL score more than a missed credit card minimum due. Only switch if your cash flow supports the EMI.
• You won't run up the card again: The biggest trap — people take a PL to clear the card, then spend on the card again. Now they have both EMI and fresh card debt. If this is a risk, cut the card first.

The Hidden Costs Banks Won't Tell You

Banks aggressively push personal loans to credit card holders — it's their most profitable conversion. But they don't highlight these costs:

• Processing fee: Typically 1.5-3% of the loan amount, deducted upfront. On a ₹2 lakh loan, that's ₹3,000-6,000 you pay before a single EMI.
• Prepayment penalty: Unlike floating rate home loans (where RBI mandates zero penalty), personal loans often carry a 2-4% prepayment charge. If you get a bonus and want to close early, you'll pay for the privilege.
• Insurance bundling: Many banks bundle loan protection insurance, adding 0.5-1% to the effective rate. Always ask if insurance is included and if it's optional.
• CIBIL impact: A new personal loan temporarily dips your credit score (hard inquiry + new account). If you're planning a home loan in the next 6 months, the timing matters.

The Honest Verdict

If your credit card outstanding is above ₹1 lakh and you can get a personal loan below 16% with processing fee under 2%, the switch almost always saves money. For amounts below ₹50,000, it's usually better to just pay ₹5,000-10,000 extra per month on the card directly — you'll clear it in under a year without any fees.

The calculator above accounts for all of this — processing fees, the exact interest differential, and the break-even month. We only recommend switching when the net saving exceeds ₹5,000, because anything less isn't worth the paperwork and CIBIL impact.