Should You Opt For Loan Against Credit Cards?

Fastest, easiest, smoothest and most convenient, yet, there are some impacts that can't be overlooked
Should You Opt For Loan Against Credit Cards?
Should You Opt For Loan Against Credit Cards?

Credit cards are one of the quickest and most convenient options for securing a loan. But this facility is available only to select subscribers based on their card types, spending patterns, bill repayment history and some other parameters of their credit profile.

Let’s discuss some of the pros and cons of availing loan against credit card.

Pros Loan Against Credit Cards 

No collateral/security required: Being an unsecured loan, it does not require any collateral or security. Credit card issuers are given offers of pre-approved loan against credit cards. So, they need not block their existing assets and investments to avail a loan from the lender, keeping them free for other uses.

Quick disbursal: Since these are pre-approved and an eligible user need not undergo fresh documentation, loan against credit card usually has the fastest processing and disbursals among most credit options. Usually these loans are disbursed within a few hours of making the application, while at times it is done even in a few minutes. An eligible cardholder needs to make the loan application through internet banking or customer care executives and the loan amount is transferred directly to their account or sent through demand drafts. However, the final access to the loan amount may take up to a few days in case of credit card loan disbursals made through cheques or demand drafts.

No restriction on end use: Loan against credit card has no restriction on the final usage of the money, except for speculative purposes. It makes it an alternative to personal loans, especially for buying high-value merchandises and consumer goods and for dealing with financial exigencies and immediate shortfalls. 

EMI facility: The repayment is made in the form of equated monthly instalments (EMIs). The EMI amount is usually added to the credit card bill of the card user, which needs to be repaid by the due date. The availability of EMI facility, along with loan tenures of up to 60 months, give the user an option to avail the optimum loan tenure based on his repayment capacity.

Cons Of Loan Against Credit Cards 

Impact on cash withdrawal limit: Similar to credit limit, the credit card issuer sets a limit for cash withdrawals through the credit card. This limit is generally a fraction of the credit limit. Some credit card issuers block the whole cash withdrawal limit on opting for loan against credit card. While ATM withdrawals through credit cards should be avoided to the extent possible due to high charges involved, having this option open may help in dealing with financial emergencies or shortages requiring cash payments. Hence, contact your card issuer about the impact on cash withdrawal limit before opting for a loan against credit card.

Higher interest rate: The interest rate of credit card loans vary widely depending on the credit profile of the card holder. However, it has been observed that the credit card loan interest rates are usually a notch higher than personal loans interest rates offered by the same issuer to the same card holder. Similarly, the credit card loan interest rates are usually higher than the interest rates of secured loan options with no end-usage restrictions like gold loans, top-up home loans, etc offered to credit card holders by their card issuers. This is because lenders have lower credit risk in case of secured loans due to the availability of adequate collateral.

Reduced credit limit: A loan against credit card is sanctioned against the cardholders’ credit limit. Hence, the credit limit of the card holder is blocked temporarily up to the extent of the loan amount disbursed. However, credit limit starts to get freed up by the amount repaid by the card holder. Thus, availing a credit card loan will temporarily reduce your ability to use your credit card for making regular spends or unforeseen expenses during financial emergencies. However, note that some credit card issuers also offer a variant of loan against credit card wherein the card user can avail loan over and above their credit limit. The usual credit limit is left free making credit card spends as usual. 

The author is Director,

The views expressed are the author’s own. Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly. 

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