Understanding loan against credit card

The importance of quick cash is really important in case you have any emergencies such as medical, job loss, a big purchase, or any other financial need. The best and quickest option is loan against credit card. This service lets you borrow money by using your credit card limit as security. Let’s understand how it works, its benefits, potential drawbacks, and whether it's the right option for you.

What is a Loan Against Credit Card?

A loan against a credit card is a personal loan from banks or financial institutions for people who already have a credit card. You don’t need extra paperwork or approval because the loan is based on your current credit card limit and payment history. Basically, you get part of your credit limit as a loan and repay it in monthly installments.

Key Features of Loan Against Credit Card:

1. No Collateral Required:

• This loan is unsecured, meaning you don't need to provide any collateral or security.

2. Quick Approval and Disbursal:

• Since you are already a credit card holder, the approval process is quick, and funds are disbursed almost instantly.

3. Flexible Repayment Options:

• The loan can be repaid in flexible EMIs over a period of time, usually ranging from 6 to 60 months, depending on the lender.

4. Loan Amount:

• The loan amount is typically a percentage of your credit card limit. For example, if your credit limit is ₹1,00,000, you may be eligible for a loan of up to ₹70,000, depending on the bank’s policies.

5. Interest Rates:

• The interest rates for loans against credit cards are usually lower than regular credit card interest rates but higher than secured loans.

6. No Impact on Credit Limit:

• The loan amount is separate from your available credit limit, so you can continue using your credit card for regular transactions.

How Does a Loan Against Credit Card Work?

When you choose a loan against your credit card, it’s easy and simple. Here’s how it usually works:

Step-by-Step Process:

1. Eligibility Check:

• The bank or financial institution checks your eligibility based on your credit card history, credit limit, and repayment behavior. Generally, if you have a good credit score and a consistent payment history, you are eligible for this loan.

2. Loan Offer:

• Once deemed eligible, the bank offers you a loan amount, which is usually a percentage of your available credit limit. The exact percentage varies by the lender.

3. Loan Disbursal:

• Upon acceptance of the offer, the loan amount is credited directly to your bank account or sometimes added to your credit card balance.

4. Repayment:

• The loan is repaid through monthly EMIs, which are deducted from your bank account or charged to your credit card. The EMI amount includes both the principal and the interest.

Example Scenario:

Suppose you have a credit card with a limit of ₹1 lakh. Based on your creditworthiness, the bank offers you a loan of ₹50,000 against your credit card. You choose to repay this loan over 24 months with an interest rate of 15% per annum. The monthly EMI for this loan would be approximately ₹2,422. This amount will be deducted from your account each month for the next 24 months until the loan is fully repaid.

Benefits of Taking a Loan Against Credit Card

1. Instant Access to Funds

One of the primary advantages of a loan against a credit card is the speed at which you can access funds. Since the bank already has your credit history, the approval process is swift, often with the loan being disbursed within minutes.

2. No Additional Documentation

A loan against a credit card needs very little extra paperwork compared to traditional loans, which require a lot of documents and proof of income. This makes it easier and less stressful to get.

3. Flexible Repayment Tenure

You can pick a repayment period that fits your budget. Choose a short period to repay the loan quickly or a longer one for smaller monthly payments.

4. No Impact on Credit Limit

The loan amount is separate from your available credit card limit, meaning you can continue to use your card for regular transactions without any restrictions.

5. Lower Interest Rates

Loans against credit cards usually have lower interest rates than regular credit card rates, though they’re not as low as those for secured loans. This makes them a more affordable option for borrowing money.

6. Improves Credit Score

If managed responsibly, taking a loan against your credit card and repaying it on time can boost your credit score. It shows lenders that you can handle different types of credit effectively.

Potential Drawbacks of Loan Against Credit Card

1. Limited Loan Amount

The loan amount is limited to a percentage of your credit card limit, which might not be sufficient for larger financial needs.

2. Risk of Debt Trap

If you’re already carrying a balance on your credit card, taking a loan against it can increase your financial burden, leading to a potential debt trap if not managed wisely.

3. Impact on Credit Score

Failure to repay the loan on time can negatively impact your credit score, making it harder to secure loans in the future.

4. Penalties for Early Repayment

Some banks may charge a prepayment penalty if you choose to repay the loan before the tenure ends. This can increase the cost of borrowing.

 When Should You Consider a Loan Against Credit Card?

1. Emergency Expenses

If you need funds urgently for medical emergencies, repairs, or any other unexpected expense, a loan against a credit card can provide quick access to money.

2. Short-Term Financing

If you require short-term financing and are confident you can repay the loan within a few months, this type of loan can be a convenient option.

3. Consolidating Debt

If you have high-interest debts, such as payday loans or other credit card balances, you might consider taking a loan against your credit card to consolidate and pay off these debts at a lower interest rate.

4. Avoiding Credit Card Cash Advances

Credit card cash advances come with very high-interest rates and fees. A loan against your credit card can be a more cost-effective alternative.

Summary

Conclusion

A loan against a credit card is a fast and easy way to get money for short-term needs or emergencies. However, you should carefully consider the pros and cons before choosing this option. Make sure you can afford the monthly payments and that it fits with your financial goals. Use this loan responsibly to avoid high debt and harm to your credit score. Always check your finances, understand the loan terms, and only borrow what you can repay.

Frequently Asked Questions (FAQs)

1. What is a loan against a credit card?

• A loan against a credit card is a type of personal loan where you borrow money using your credit card limit as collateral. The loan is based on your existing credit limit and payment history.

2. How does a loan against a credit card work?

• The loan amount is determined by a portion of your credit card limit. You repay the loan through monthly installments (EMIs), similar to a regular loan, but with minimal additional paperwork.

3. What are the benefits of a loan against a credit card?

• Benefits include faster access to funds, less paperwork compared to traditional loans, and flexible repayment options. Interest rates are usually lower than regular credit card rates.

4. Do I need to provide additional documentation for this loan?

• Typically, no additional documentation is required beyond what is already on file with your credit card issuer. This makes the application process easier.

5. Can I use the loan amount for any purpose?

• Yes, the loan amount can typically be used for any purpose, such as emergencies, debt consolidation, or personal expenses, unless the credit card issuer specifies restrictions.