A loan against a credit card does not need any collateral like a personal loan, but it is not a personal loan in the traditional sense. Nevertheless, this option is only available to cardholders.
A credit card may be useful for online payments, but not when you need cash. Depending on the credit card company, the cash withdrawal limit varies, but it may not be enough if you need more cash. Moreover, interest charges are lower on credit card loans than on cash withdrawals. Usually, the borrower gets the loan amount as a bank draft or is transferred to the bank account. Also, since a credit card loan is pre-approved, you can easily avail of these loans if you have a good credit history. So, let’s now explore the features of a credit card loan.
Since you have already submitted the necessary documents while applying for the card, the loan is sanctioned instantly as soon as you opt for the loan.
Easy Equated Monthly Installments (EMIs)
Typically, lenders offer various repayment periods to choose from. For example, in the case of Axis Bank, the loan period could be from 12 months to a maximum of 60 months.
The loan disbursal is usually fast as it is pre-approved, and the amount is credited to your bank account. HDFC Bank asks for only the HDFC credit card number and the registered mobile number for OTP verification. Once it is verified, the loan is disbursed.
Available Through Different Modes
To avail of this loan, one need not visit the bank branch always. Many lenders offer the loan through net banking and phone banking. Because of no paperwork, one can apply for this loan online from anywhere. The loan is subject to the available credit limit on the card. Some banks offer loans above the customer's credit limit at their discretion, based on credit utilisation, repayment history, and cash withdrawal limit.
Charges On A Credit Card Loan
Processing Fee: The borrower must pay a processing fee to avail of a loan. The charge differs for different lenders. For example, HDFC Bank charges Rs. 999, excluding goods and service tax (GST).
However, one should always check if there are any other hidden charges. Sometimes, lenders would not tell about other expenses, such as bouncing costs, etc., until asked.
Interest Rate: The interest charged on a credit card loan is lower than for credit card purchases. But compared to a personal loan, the interest rates on a credit card loan are higher. Generally, the interest rate is around 11-12 per cent for personal loans, but it could go as high as about 20 per cent or more for credit card loans.
Pre-Closure Charges: Lenders also charge a pre-closure penalty on the loans. Typically, sanctioned for 12 months, the loan tenure could be more. In addition, some lenders also charge for part payment before maturity.
Loan Default Charges: If one defaults on the loan repayment, it attracts overdue charges. Adhil Shetty, CEO of BankBazaar.com, says, "Defaults on unsecured loans are costly. Since interest rates here are higher compared to secured loans, missed payments could lead to penalties and high-interest charges. The defaulter's credit score also plummets."
Risk To Credit Score In Case Of Default
This loan comes at a higher interest rate compared to the secured loans. In case of default, it can severely affect the borrower's credit score and credit history, making future borrowings difficult.
Says Shetty, “A borrower with a poor credit score – typically under 700 – will have to pay higher interest charges on future loans. The lender may provide a settlement option. That may help the borrower get the lender off their back but won't save them from credit score damage."
So, of the various options available in the market, a personal loan costs less than a credit card loan. Therefore, one should consider a credit card loan only when necessary.
Says Shetty, “You must weigh your options, and one may not always be better than the other. Interest rates make a difference, and you should go with the option that optimises the various costs and processing time.”
The default, if happens due to any reason, can derail your creditworthiness. So, one should evaluate all the pros and cons, such as costs and benefits, before applying for a credit card loan.