Under the present circumstances, pre-approved digital loans have emerged as the most reliable credit source for meeting liquidity mismatches as these usually involve no physical interaction.
The lockdown-related restrictions have severely impacted the lending operations of banks, NBFCs and other lenders. Under the present circumstances, pre-approved digital loans have emerged as the most reliable credit source for meeting liquidity mismatches as these usually involve no physical interaction. One of the most convenient types of digital loans is loan against credit card. It is a pre-approved loan offered by the credit card issuers to their select credit cardholders based on their card type, spending pattern, credit limit and bill repayment history.
Here are some of the factors that need to be considered before applying for a loan against credit card.
1. Loan amount
Credit card loans can be availed only up to a predetermined limit sanctioned by the card issuer. On availing this loan, the credit limit of the cardholder is temporarily blocked up to the loan amount. However, the limit gradually gets freed as one keeps repaying the loan EMIs. Some credit card issuers also offer loan against credit card over and above the credit limit available on the card. But it depends on the customer’s repayment capacity and past repayment behaviour along with other factors. Availing this option will keep the cardholder’s credit limit intact for conducting usual credit card spends.
2. Processing time
Loan against credit cards generally have the quickest processing and disbursal among all credit facilities. As the eligible cardholders are not required to undergo physical documentation, it helps in ensuring quick disbursals. The loan disbursals are made within a few hours of applying for the loan. Some card issuers also claim to disburse credit card loans within a few minutes. Eligible credit card users just need to apply online through internet banking or contact customer care support and the loan amount is directly credited to your account or sent to you through a demand draft.
3. Repayment tenure
Tenure of credit card loans usually ranges between 1 and 5 years, with some card issuers offering minimum tenure as low as 6 months. However, remember that longer tenures would increase your interest cost too. On the other hand, as the EMIs will be clubbed with your credit card bill, non-payment by the due date will also attract finance charges and late payment fee. Hence, choose your loan tenure based on your repayment capacity.
4. Processing charges
Processing fee on loan against credit cards can range anywhere from 1-2.5% of the loan amount, depending on the card issuer. Hence, ensure to include the processing fee while calculating the overall cost of the loan.
5. Interest rate
The interest rate of your credit card loan will depend on your credit score, card repayment history, employer’s profile, job profile, credit card type, etc. The interest rates of credit card loan are usually at least 1% higher than the interest rates of personal loans available to the same credit profile. However, card issuers can charge higher interest rates during economic uncertainties like the current one. Hence, those with multiple credit cards should compare the interest rates offered by their existing credit cards as well as interest rates of instant personal loans, if any, available from other lenders.
6. Impact on your cash withdrawal limits
Just like credit limits, credit cards also sanction a limit on cash withdrawal allowed through your credit card. This limit is usually a fraction of your overall credit limit. Some credit card issuers block the entire cash withdrawal limit on availing loan against credit card whereas others don’t. While making ATM withdrawals should always be avoided to the extent possible, having that option open might help in mitigating financial exigencies.
Credit card loans have one of the quickest disbursals with zero documentation. Their pre-approved nature and the ability to make loan applications through the internet banking or phone banking channels make them one of the best credit sources during the pandemic. However, while applying for your credit card loan, ensure to go through instant personal loans, if any, available from other lenders. While these loans can be equally quick, they might cost you lower interest rates than a loan against credit cards.
(By Sahil Arora, Director & Group Head-Investments, Paisabazaar.com)