7 Important Things to Know Before Taking a Loan Against Credit Card

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First, let us understand what Loan Against Credit Card is;

• Loan Against Credit Card is an instant borrowing option available for credit card holders.

• Since the loan is offered on your credit card, it is generally offered up to your unutilised credit limit.

• It is an unsecured loan like a personal loan, where you do not have to provide any collateral and comes with a fixed interest rate over a set tenure.

• The interest rate charged on the Loan Against Credit Card is typically lower than what is set on regular credit card transactions. However, it could be higher than that of a personal loan.

• Since Credit Card Loan is offered only to credit card holders who had already submitted their personal and income documents at the time of applying for a credit card, the credit card providers do not ask for any additional documents for the loan. Besides, many credit card providers offer this loan to the cardholders based on your credit card transactions and repayments, making it available only to pre-approved customers. Hence, the loan can be availed almost instantly.

• The loan amount is disbursed to your registered bank account. There is no restriction on the end-use of the loan amount, as far as it is used for a legitimate purpose.

• The loan amount is billed to your Credit Card every month, and it makes it easier for the borrower to repay in easy monthly instalments.

• The processing fee for the Loan Against Credit Card is negligible. Many credit card providers have offers during festive seasons when they process these loans without any processing fee.

• The loan can be availed by logging into your online credit card account, internet banking, mobile banking, or through Customer Support.

Here are the 7 important things to know before taking a Loan Against Credit Card:

1. Interest Rate:

The interest rate charged on a Loan Against Credit Card is lower than the interest rate charged on regular credit card purchases, which is typically 25% to 40% per annum. However, the Credit Card Loan interest rate is still higher compared to other types of loans like personal loans, car loans, loans against property, etc.

2. Processing Fees:

Depending upon the lender's terms and conditions, you will have to pay the loan processing fee to the lender. There could be other charges apart from the processing fee that the lender might not upfront tell you about. Therefore, it is necessary to get information about all such hidden charges in advance from the lender. Based on the interest rate and other fees, calculate if the loan is affordable to you. Generally, lenders charge affordable processing fees on Credit Card Loans. In fact, some lenders run special offers, especially during festive seasons, when they provide up to 100% off on the processing fees.

3. Pre-closure of Loan:

Like any other type of loan, Loan Against Credit Card attracts pre-closure charges, which may vary from lender to lender. However, unlike a loan taken offline, you do not require to intimate the bank or NBFC about the pre-closure. The loan can be pre-closed through your online credit card account or internet banking by paying the entire dues, including pre-closure charges, which you will be able to check online while closing the loan.

4. Flexible Loan Tenure:

Credit Card Loans offer flexible loan tenures. While availing of a loan, you, the borrower, get to choose the loan tenure. Generally, the lenders offer loan tenure of up to 24 months for credit card loans, letting you choose the tenure as per your convenience and affordability of monthly repayment.

5. Top-up Loan:

A Top-up Loan is a loan offered on your existing loan. Many credit card providers offer Top-up Credit Card Loans on Loan Against Credit Cards. Since it comes with the same interest rate and terms, if you are in need of funds, it is an easier option to borrow money instantly. However, the top-up loan is offered only to the existing customer with a strong repayment record, i.e., borrowers who have been consistently repaying the dues on time, without any default or late repayments.

6. Loan Default:

Even if it is a loan taken against your credit card, the irregularities in the loan repayment or loan default can attract heavy late repayment charges and negatively impact your credit score. Besides, not paying your EMIs and Credit Card dues on time is a sign that you might be falling into a debt trap, which becomes challenging to come out of.

7. Impulsive Loan:

Credit Card Loans are high-cost loans which are generally not preferred by financially disciplined individuals. Due to the benefit of instant availability of the loan, the loan is preferred by borrowers that are falling into a debt trap, individuals who make impulse purchases, and individuals in financial emergencies. If you come into the first two categories, it is advisable to reconsider your decision as the high-cost loan can further worsen your financial situation in the future.

To Conclude:

Credit Card Loans are unsecured, which makes them costlier than secured loans. Therefore, it is advisable to opt for a Loan Against Credit Card only in case of an emergency when you do not have any collateral and need funds urgently. If you are eligible, you can also consider taking a personal loan instead of a credit card loan, as it still comes with a lower interest rate. It is not a good idea to opt for such costly loans for luxuries or buy unaffordable items like electronic gadgets, vehicles, furniture, etc. Hence, it is crucial to analyse your needs and make the right borrowing decision.

Warm Regards,
Ketki Jadhav
Content Writer