Loan Against Credit Card
Loan against credit card is almost similar to personal loan with respect to its interest charges and EMI payment options.
Loan against credit card doesn’t require any documentation, whereas it is required for a personal loan.
Eligibility for the applied loan amount completely depends on the usage and payment history of one’s credit card. If credit card payment history is really good, then the bank staff themselves will call and offer you the loan. Otherwise, you can also call the customer care and inquire about the loan offer details.
Some key points about loan against credit card:
- Rate of interest varies from 16% – 30% per annum [Diminishing rate]
- No need of any documentation. Loan will be given against your credit card.
- Payment will be in the form of EMIs.
- Number of months for the loan must be in multiple of 3. Ex: 3, 6, 9, 12 months.
- Money will be disbursed within 2-3 business days
- EMI due date will be the same due date of your credit card each month
Points to remember before taking loan against credit card:
The amount of available credit limit on your credit card will be decreased after you take the loan. Since the loan will be given to you against your credit card, the same amount of money you take as loan will be lessened from your credit card credit limit.
Your actual credit card credit limit is: rupees 1, 00,000[1lakh].
You take a loan of rupees 60, 000.
Since your loan amount is rupees 60,000, your available credit limit will be 60,000 rupees [loan amount] less than your total credit limit of rupee 1, 00, 000 [1lakh]
It will be like:
1, 00, 000 (Actual credit limit) – 60,000 (loan amount) = 40,000 (credit limit after you take loan)
So, you can’t use your credit card for purchase of items worth more than rupees 40,000.
You don’t need to worry about your decreased credit limit. Reason is, the moment you start paying some XYZ amount to the bank towards your EMIs, the same XYZ amount will be added back to your credit limit.
Let’s say, your loan EMI is 5,000 rupees for 12 months.
Your available credit, in the above example, has become 40,000 rupees after you take the loan of rupees 60,000 [Initial credit limit is rupees 1, 00,000(1lakh)].
After you make 1st EMI payment of rupees 5000, the same amount will be added to your credit card credit limit. Your credit limit will become rupees 45,000 [40000(available credit limit after the loan) + 5000 (EMI)].
Same way, it happens each month. The moment you pay the EMI, your credit limit will be increased by the same EMI amount.
That means, after 12 months, your credit card credit limit will become 1 lakh rupees again.
Fore closing charges apply for loan against credit card:
It’s not advisable to fore close a personal loan and loan against credit card for the below mentioned reasons:
First,you need to pay some fore closing charges (usually minimum 3%) on the balance principal amount. That means you are paying some additional amount than the actual principal amount.
Second, banks will not agree to foreclose your loan within 6 months or 12 months. By the time you finish 6 months or 12 months, you will end up paying major portion of the interest amount. Very little amount of the principal will be left after 6 or 12 months.
You can’t cancel your credit card unless you fore close your loan:
Once you take loan against credit card, you cannot cancel the respective credit card. To cancel your credit card, either you must wait till your loan tenure gets completed or you must foreclose your loan by the balance loan amount.