One of the most popular ways to get access to emergency funds is to get a personal loan from a bank or NBFC. But did you know that you could avail a similar loan on your existing credit card?
Credit card holders can get loans from their lenders depending on their credit history, repayment capacity and credit limit. Although similar to personal loans, they do have some fundamental differences that may make it a good option for some borrowers.
Here's all you need to know about loans from credit cards.
Good Credit History
Most credit card loans are unsecured loans, so if you default, the credit card issuer has no immediate way to recoup their loss. The issuer thus has to make a careful decision on who is and is not awarded a loan against their card, based on credit rating. Factors like your credit card bills repayment history and credit utilisation will factor in the eligibility for you to credit card loans.
Quantum of Loan
Most loans against credit card are pre-approved or pre-qualified loans. The amount of loan that one can avail with a credit card thus depends on the nature of card you have like Silver, Gold, Platinum and more. It also depends on the credit limit of the card as most loans against credit cards will not exceed the total credit limit of the card.
Credit card companies charge you an annual percentage rate or APR to loan money when you use your card but do not pay within the interest-free period. The APR is a variable rate that can range from a zero percent promotional rate to as much as 29 percent if full amount is not paid on time.
But if you take a loan against your credit card, the interest rate will not be decided as per the APR. In many cases it is much lesser than personal loans and gets disbursed at a faster rate with no additional documentation.
Processing and Other Fees
A processing fee may be charged and is generally more nominal in case of credit card loans than personal loans. You can even pre-pay or foreclose such loans like personal loans. They may attract some charge but lesser than what personal loans do.
Loss of Credit Limit
For those loans which are given based on your credit limit, you will have to trade off your credit limit of your card. For instance if you have an on-going credit card loan on a particular card, the credit limit that you usually enjoy on that particular card, can be reduced by the bank or even frozen, to avoid you running up a huge credit. The limit will be gradually increased as you repay some part of your credit card loan.
Late Payment and Default
Late payments of defaults on such loans can have high impact on your credit score. Make sure to pay the full EMI on time as the loan repayment here will not work like a credit card, where only a minimum balance can be paid.
(Adhil Shetty is CEO of Bankbazaar.com)
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