Loans against credit cards aren’t an uncommon phenomenon. However, before getting one, you should be aware of a few important things.
Loans against credit cards aren’t an uncommon phenomenon. Many banks offer individuals with loans against credit cards at varying interest rates. However, before we go on to highlight some noteworthy facts and pointers, let us understand what a loan against a credit card implies.
What exactly is a loan against a credit card?
A loan against a credit card is very similar to a personal loan – it is unsecured (requiring no collateral), and comes with a fixed rate of interest over a set tenure. The maximum loan amount will not exceed the credit limit on your credit card, and the interest rate is lesser than the prevalent rates on credit card transactions (the annual rate of interest on credit cards is usually in the range between 35% and 40%, sometimes more – varies from card to card).
If you have a loan on your credit card, here are some things that you should be aware of:
1. Late payments can affect your chances to get a top-up loan
Many banks offer top-up loans to individuals against credit cards. In order for this to happen, an applicant is expected to have a clean credit history with no instances of inconsistent payments. If you have a loan against your credit card, late payments can impact your chances of getting a top-up. So in any case, avoid late payments if you wish to get loans in future.
2. A default is recognized as a loan default and not a credit card default
There is a significant difference in the impact that defaults on credit card repayments and those on loan repayments have. A default on a loan against a credit card will amount to a loan default, having a much more severe effect on your credit score. While credit card defaults also affect credit scores quite significantly, the impact is more pronounced on loan defaults, especially home loan defaults.
3. You can choose a tenure of your choice
Most loans on credit cards come with a flexible tenure option – meaning, the customer can opt for a repayment period of his/her choice. In the case of most banks that offer unsecured loans against credit cards, the maximum allowed tenure is 24 months. There are some banks that have tenure options over 24 months as well.
4. Interest rates on credit card transactions attract normal credit card interest rates
Say your loan against your card amounts to 75% of your credit limit. On the remaining 25%, prevalent credit card interest rates are applicable. Meaning, if you use your card to make a transaction and fail to repay it within the interest-free period (as is applicable on your credit card), interest rates of about 35% per annum. will hold accordingly applicable.
5. You can pre-close your loan at any time
If you wish to pre-close the loan you have against your card, you can do so at any time, without necessarily intimating your bank. Pre-closure charges, as determined by your lender, will be levied.
6. Processing charges hold relevance too
When you take out a loan against your credit card, processing fees are levied on your loan, and the extent mostly depends on the bank in question. In most cases, processing charges on personal loans fall in the range between 1% and 5%.
(By Aditya Kumar, Founder & CEO, Qbera.com)