For many individuals in India facing a sudden cash crunch or an unexpected expense, a credit card is often the first port of call. However, beyond regular swipes and purchases, most credit cards offer a less-talked-about facility: a loan against the credit card's limit. This financial product allows cardholders to access a lump sum amount, providing a quick alternative to traditional personal loans. But how does it work, and is it the right choice for you?
Understanding the Loan Against Credit Card Facility
Essentially, a loan against your credit card is a pre-approved offer extended by your card issuer. It allows you to borrow money up to a certain percentage of your total credit limit. This amount is then converted into easy monthly installments (EMIs) for repayment over a fixed tenure, which can range from a few months to a couple of years.
The key feature of this loan is its pre-approved nature and swift disbursal. Since the bank has already assessed your creditworthiness while issuing the card, the loan approval process is almost instantaneous. The funds are typically transferred directly to your linked bank account within 24 to 48 hours, making it a viable option for urgent financial needs.
Eligibility Criteria and Key Features
Not every credit cardholder automatically qualifies for this loan. Banks have specific eligibility criteria, though they are generally simpler than those for a fresh personal loan application.
Primary eligibility revolves around your credit history and card usage. Banks typically offer this facility to customers who have held the card for a minimum period, often 6 to 12 months, and have a history of timely payments. Your credit score, income, and existing relationship with the bank also play a significant role. The loan amount is usually a percentage of your available credit limit, often between 75% to 90%.
When it comes to features, here are the main aspects to note:
- Interest Rates: The interest charged on these loans is typically lower than the finance charges on regular credit card purchases but can be higher than standard personal loan rates. It's crucial to check the exact rate, which is often expressed as a monthly reducing rate.
- Processing Fees: Most banks levy a one-time processing fee, which is a percentage of the loan amount. This can range from 2% to 3%.
- Flexible Tenure: Borrowers can usually choose a repayment tenure that suits their budget, commonly from 3 to 48 months.
- No Collateral: Like your credit card spending, this is an unsecured loan, requiring no physical asset as security.
Critical Considerations Before You Apply
While convenient, a loan against a credit card is not free money. It comes with specific costs and implications that require careful thought.
First and foremost, compare the effective interest rate with other available credit options, such as a personal loan or a gold loan. Calculate the total cost of borrowing, including the processing fee. Secondly, availing of this loan will block a significant portion of your available credit limit until it is substantially repaid. This can impact your credit utilization ratio, a key factor in your credit score.
Furthermore, defaulting on the EMI payments can lead to hefty penalties and negatively impact your credit history. It's also important to remember that this facility is meant for planned or emergency expenses, not for frivolous spending. Always have a clear repayment plan in place before you opt for it.
In conclusion, a loan against your credit card can be a powerful financial tool for managing short-term liquidity needs due to its speed and convenience. However, it demands financial discipline. By understanding the features, eligibility, and total cost involved, you can make an informed decision and use this facility to your advantage without falling into a debt trap.
