Should you clear credit card dues with a personal loan? | The Financial Express

Should you clear credit card dues with a personal loan?

From the pure interest rate point of view, it may make sense to opt for a personal loan to clear off large credit card dues.

Should you clear credit card dues with a personal loan?
Personal loans, on the other hand, are priced based on the borrower’s risk evaluation, i.e., credit profile and lender's risk policy,” he says.

It is always advised to use a credit card only when you can pay off the dues in time. But there are times when customers make a lot of discretionary spending and realise later that they do not have enough money to make the credit card payment before the due date. In such situations, does it make sense to take a personal loan to settle the credit card dues? Let’s examine.

Credit cards in India charge 3%-4.5% per month interest rates, with no risk-based pricing, while personal loan rates vary between 10.25% per annum for high credit-worthy individuals and up to 29.95% for certain subprime loans.

Credit card balance

From the pure interest rate point of view, it may make sense to opt for a personal loan to clear off large credit card dues. “If an individual cannot pay their credit card bill in full, it is wise to opt for a personal loan and clear off the credit card balance,” says Gaurav Chopra, CEO & founder of IndiaLends.

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Personal finance experts give two good reasons for this.

First, personal loans typically have a lower interest rate and longer tenure, giving the credit card holder more time to clear the dues.

Second, the borrower’s credit profile is protected from negative remarks due to delayed or partial payments. Lower credit scores can result in a higher cost of borrowing in the future. “Although certain credit card issuers are experimenting with lower annual percentage rate (APR), it isn’t an industrywide practice.

Personal loans, on the other hand, are priced based on the borrower’s risk evaluation, i.e., credit profile and lender’s risk policy,” he says.

Flip side of personal loan

However, there is a flip side to taking a personal loan to settle credit card dues.

“From an interest rate standpoint, taking out a personal loan to pay off credit card debt appears to be relatively affordable, but in reality, you are delaying your credit due and agreeing to pay the credit due in months, which will have an effect on your future cash flow,” says Akhil Rathi, vice-president, Financial Concierge at 1 Finance, a personal finance advisory platform. He says one should use the personal loan option only if there is an emergency.

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First published on: 05-12-2022 at 01:00 IST