Consider Before Taking A Loan Against Credit Card

Loan against credit cards is pre-approved loans offered by card issuers to select existing cardholders based on various parameters including repayment history, transaction pattern, card type, credit risk profile. With near-instant disbursal, these loans have one of the quickest processing and disbursal among all credit facilities. This makes credit card loans a useful option for credit card holders for fulfilling their urgent monetary requirements.

Explained here are some crucial factors to consider before applying for a loan against credit card:  

Repayment tenure: The tenure for a loan against a credit card generally ranges between 1-5 years, while some credit card issuers tend to offer tenure as low as 3 months. However, keep in mind that longer tenures involve higher overall interest cost. Also, given that the loan’s EMIs get clubbed with the card holder’s credit card bill, failure to pay by the due date would attract hefty finance charges as well as late payment fee. The finance charges of unpaid credit card dues can range between 30-49 per cent p.a. depending on the card whereas late payment fee can go up to Rs 1,200 per billing cycle. Therefore, it would be prudent to select loan tenure based on your repayment capacity.

Interest rate: The interest rate on credit card loan can depend on factors like the card holder’s credit score, card repayment history, job profile, credit card type, etc. Interest rates on loan against credit cards are usually at least 1 per cent higher than the interest rates of personal loans available to the borrowers with the same credit profile. Hence, cardholders having multiple credit cards should compare interest rates offered by their existing credit card issuers and then, follow it up by visiting online financial marketplaces to compare the interest rates on personal loans offered by various lenders.

Processing time: As credit card loans are pre-approved and the eligible credit cardholders do not have to undergo any physical documentation, loan against credit cards have one of the quickest processing and disbursal loans amongst all credit facilities. Loan disbursal usually takes place within a few hours of applying for the loan, with some card issuers even claiming near-instant disbursal within a few minutes. Credit card holders eligible for credit card loans just need to apply for it through internet banking or can contact customer care support of the card issuer for the same. The loan amount usually gets directly credited to the card holder’s account or sent through demand drafts.  

Loan amount: Loan against a credit card can be availed only up to a predetermined limit sanctioned by the card issuer to the cardholder. The credit limit of the cardholder gets temporarily blocked up to the loan amount upon availing this loan. However, as the cardholder keeps repaying the loan EMIs, the credit limit gradually gets freed. Some credit card issuers also offer credit card loans over and above the credit limit available on the customer’s card, depending upon the card holder’s past repayment behaviour and repayment capacity. This option keeps the card holder’s credit limit intact, thereby enabling them to conduct the usual credit card spends on their credit card.

Impact on cash withdrawal limit upon availing the loan - Credit card issuers also sanction a cash withdrawal limit on the credit card just like credit limits available on the card. The cash withdrawal limit is generally a fraction of the card holder’s overall credit limit. Upon availing credit card loan, some credit card issuers tend to block the card holder’s entire cash withdrawal limit whereas others don’t do so. Although it’s always advisable to avoid making ATM withdrawals from credit cards to the extent possible, having that option open might help tackle financial emergencies.

Processing fees: Processing charges/fees on credit card loans usually range from 1-2.5 per cent of the loan amount depending on the lender. Hence, credit card holders should factor in the processing fee while calculating the overall cost of the loan against the credit card.  

The author is Director, Paisabazaar.com