There are many benefits to taking a loan against your credit card as well as pointers that you need to be aware of. Here are some of them:
Instant loan:
When you need money right now, time is of the essence. With a loan on your credit card, you don’t have to submit documents, submit collateral, wait for approval, etc., as these loans are unsecured and pre-approved. The only eligibility criteria are that you have a good repayment track record.
Easy EMI:
For loans on credit cards, depending on the bank you are with, you can easily convert your purchases into EMI or convert the entire loan into EMIs that suit your pocket and flexibility. You can choose from a wide range of tenures. You can also choose whether the EMI has to go from the credit card limit itself or from another savings account on another card. This makes it easier to manage the repayments and makes it less of a burden on your monthly budget too.
Balance transfer:
You can choose to transfer your outstanding balance from any other bank’s credit card, which has a higher interest rate, to your loan on credit card which has a lower interest rate. You can even use it to consolidate all your other debts, especially on any other personal loan.
This makes it easier to pay off all your debts through a single EMI on one card rather than multiple EMIs to multiple banks every month. Consolidating your debts into one loan on a credit card which has a lower interest rate makes for easier repayments and more savings in the long term.
Easy repayments:
Paying back your EMIs on credit card loans is easy as you have multiple modes of payments (depending on your bank). You could pay through netbanking, through the bank’s credit card mobile application, etc.
Top-up loans:
Top-up loans against credit cards are also offered by banks to eligible customers. This can be helpful when you want to have more money all of a sudden.
With so many benefits to taking a loan on credit card, there are also some things to keep in mind to ensure that your credit score is not affected and you continue to enjoy the benefits. These are:
Avoid late payments or defaults on your payments:
This can affect your credit score and any chances of getting a loan in the future, especially a loan on your credit card. So make sure to pay back your EMIs on time.
Long-range tenures:
While tenures over a longer-term may incur heavier interest rates, the fact is that it will be lighter on your pocket in the short-term, giving you more expendable income. Banks offer up to 24 months' tenure on loans against credit cards and sometimes more if you negotiate.
Pre-closure:
You can pre-close your loan taken on your credit card without having to intimate the bank in advance. There may be nominal pre-closure fees applicable.
Processing charges:
You need to be aware that there are processing charges on loans against credit cards that can range anywhere from 1% to 5% of the loan amount, depending on your bank.
Loan default:
A default on your loan against a credit card will have a more negative impact on your credit score than default on your credit card outstanding dues. This is because it is considered as a loan default, which is far more serious. Your credit score can take a beating because of this, making it difficult to get loans in the future. Even if you do get loans, it might be on terms that are difficult for you, such as higher interest rates and lower quantum of loans.
Keep in mind that you can only take a loan against your credit card which is within your credit limit. While the interest rates on these loans are generally lower than that of cash withdrawals from your credit card, they are still in the range of 13% to 21%, depending on your bank. However, in times of a financial crunch, these loans are a boon. As long as you repay your dues on time and keep your credit score on track, a credit card will always be a best friend in your pocket.
