Is a Personal Loan Against Your Credit Card a Good Idea?

We all use credit cards mainly for shopping, paying rent and bills and even as emergency cash options. But did you know you can get a personal loan based on your credit card? Yes! On your credit card! Your credit card measures your creditworthiness and provides a quick and easy loan. 

But is a loan against a credit card good or bad? Delve further to help you get that answer.

What is a loan on a credit card?

A loan against a credit card is an unsecured loan based on your credit card usage. Most leading banking institutes provide you with it if you own a sound credit card. The amount is disbursed and pre-approved, which will be repaid monthly till the loan is paid off. The usual tenure for the loan is between 12- 60 months.

How much loan can I take from a credit card?

A loan against your credit card is usually provided based on your unutilised credit limit. However, some institutes allow you to borrow more than the card limit. Your previous payment history and credit score are criteria in the picture of your loan amount. So, it may vary from person to person. Prominent bank Standard Chartered offers up to Rs. 10 Lakhs as principal amount.

Am I eligible for this loan?

As mentioned above, your eligibility for a credit card loan depends on:

• Credit card owned
• Credit score and history
• Credit card payment history

The final decision may also depend on your bank’s other criteria. So, not everyone holding a credit card may be eligible. 

Also, only the owner of the card is considered. That is, the co-owner of the card cannot apply for the loan.

Why Loan on a Credit Card?

Because it's convenient, and easy, and some banks provide the loan amount based on the credit limit available, while some lenders offer above the card limit.

Zero Documentation: 

Since the loan is against your credit card, the bank has all the information they need to process it. So, there is no documentation required. No hassle of getting Xerox copies of ID cards and whatnot.

Instant Loan: 

It is instantly approved without other verifications required. The disbursement of the funds happens swiftly to your account so that you can use the amount immediately.

Flexibility: 

You can use up the tenure of 1-5 years to repay your loan with an interest rate starting from 12%.

Convenience: 

You can avail yourself of the loans through your mobile application, net banking, and even SMS and calls!! You don't have to step into any bank branch.

Use cases:

You can utilise the amount you loaned for almost all your needs. There are only a handful of restrictions on how the fund will be used. It depends on the lenders.

For example, as per the IndusInd Bank Easy Loan, the only restriction is that the funds cannot be used for any capital market investments or repayment of Credit Card dues. Other than that, you can utilise the funds you see it.

Why not loan on a credit card?

While the loan has the advantages of being quickly approved and other benefits mentioned above, there are drawbacks to the loan against a credit card.

High-Interest Rate: 

Compared to other personal loans, the interest rate for this type of loan is high. For personal loans, the interest rate usually starts at 10%, while loans against credit cards are at 12%.

Effect on credit score: 

As the loan is taken based on your card limit and other factors, the credit utilisation ratio of your credit increases. In other words, the unused credit is reduced. The credit utilisation factor is one of the factors used to calculate your CIBIL credit score, and hence, the loan may hurt your credit score.

Increased Debt: 

When deciding to take a loan, remember you have to repay the amount. Your use of the loan amount should have the repayment of the loan also planned. You must ensure that the pressure is not increasing on yourself and your family.

In summary, a personal loan against a credit card is a convenient benefit of owning a credit card. Most banks offer loans based on unused credit, with zero documentation, easy approval, fewer processing charges, and flexible repayment options. However, it’s essential to consider the high interest rates and potential impact on your credit score. Whether this loan is a good choice depends on your current financial situation. Assess your needs and consult with your bank to understand the terms before deciding. Hopefully, this read made that decision easier.

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