If you are a credit card user, it is possible for you to receive email or SMS from your bank saying that you are eligible for a loan on your credit card. To meet the growing demand for unsecured loans in India, banks allow select cardholders to take a loan against their credit cards. The eligible amount and rate of interest vary from bank to bank and also from customer to customer.
Loan on credit card is a fast and convenient way to get access to cash. Since credit card loan is cheaper than direct cash withdrawal from your credit card, you must always choose the former over the latter. However, loan on credit cards still attracts interest at significant rates.
So, before you get easy cash in your account with this seemingly convenient method, you must read on to understand its pros and cons. Here, you will also find a few alternatives that could help you tide over a financial emergency.
How Loan on Credit Card Works?
A loan on credit card is a simple borrowing and works like any other type of loan wherein you would receive a lump sum in the beginning and you would have to pay it off in smaller EMIs over a period of time. It is like a personal loan taken against your credit card. The terms and conditions with respect to the rate of interest, tenure, prepayment, etc. may vary from one bank to another.
For example, HDFC Bank Loan on Credit Card comes in two variants- Insta Loan and Insta Jumbo Loan. In case of HDFC Bank Insta Loan, your credit card limit will be blocked against the amount that you borrow whereas, in case of Insta Jumbo Loan, the amount is given to you without blocking your card’s limit. If you have HDFC Bank savings account, the borrowed amount will be directly transferred to your account and, if not, the loan amount will be given to you in the form of a demand draft.
Non-payment of the credit card loan EMIs on time will reflect poorly on your credit report and may also cause a drop in your credit score.
Loan on Credit Card Highlights:
How can you take a loan against your credit card?
You can either be preapproved for a loan on credit card or you can request for it.
When you are preapproved
Usually, your card issuer will inform you through an SMS or email when you become eligible for a loan on your credit card. The maximum amount of loan that you can avail will also be conveyed.
You can login to the internet banking portal of your card provider and go to the credit cards section. You can find the option for a credit card loan through which you can directly apply. If you have a savings account with the said bank, the amount will be directly credited. If not, you would receive a demand draft for the same. You will also receive a loan amortization schedule on your registered email address.
When you are not preapproved
If you have not received any such information and still wish to apply for a loan on credit card, you can contact the customer care department of your bank. Some banks also provide the option of requesting a loan on credit card through their net banking facility.
Once you raise a request, the bank will scrutinize your credit profile and repayment behaviour. If satisfied, you may get the option to apply for the loan on your net banking portal or a customer service executive may give you a call and guide you through the same. However, this process will take a long time and you could take a personal loan instead of loan against credit card.
Also Read: What is Credit Card Pre-approval?
Pros and Cons of Loan on Credit Cards
Costs and Risks associated with Loan on Credit Cards
Loan on credit card may look like a cheap alternative to cash advances on credit cards but it is not very economical. The rate of interest, though varying from customer to customer, is typically higher than personal loans. This is why we do not recommend taking a credit card loan for discretionary expenses like shopping or vacation.
Since your credit limit is blocked in case of a credit card loan, your credit utilization will come down which will reflect poorly on your credit report.
Should You Take a Loan on Credit Card?
Whether you should take a loan on your credit card or not depends on a lot of factors. Here are a few situations under which you can opt for a loan against credit card:
- When you need a smaller loan immediately
- When you are not eligible for a personal loan
- When you cannot afford to wait for the personal loan application processing as it takes up to one week
- When you are getting an attractive interest rate, lower than what you would get on a personal loan with other lenders
- When you are confident about paying off the loan within a year
Suggested Read: How much would a Credit Card Cost You?