You never know when an unexpected need for funds may arise. In such emergencies, having access to a fast and convenient financing option can be a lifesaver. This is where credit cards prove valuable. Nowadays, most credit cards offer the option of obtaining a quick loan against your credit limit. A credit card loan can be a reliable means to swiftly acquire the necessary funds. However, opting for a loan against a credit card presents its own set of challenges. So, read on to learn more about the process of obtaining a loan against a credit card and whether it is a good option.
See also: Lifetime free credit cards offered by top banks in India
What is a loan against a credit card?
A credit card loan is essentially a swift funding alternative accessible to credit card holders. This loan is extended against the untapped credit limit of the financial instrument. Rather than making purchases, individuals can leverage the unused portion of their credit limit to instantly access funds. The loan amount is determined based on the available credit limit and is secured by the credit card itself, eliminating the necessity for additional collateral or extensive documentation. Just like a personal loan, it is an unsecured loan accompanied by a fixed interest rate over a predetermined tenure. Borrowers can conveniently repay the credit card loan through instalments.
How to apply for a loan against a credit card?
Applying for a credit card loan is a straight process. Follow these steps to obtain a loan on your credit card:
- Step 1: Check your eligibility
Ensure that you meet the eligibility criteria set by your credit card issuer, which may include having a good credit score and a stable income.
- Step 2: Get in touch with your credit card issuer
Get in touch with the customer service of your credit card issuer either at the nearest branch or through its website. Inquire about the loan against credit card facility and familiarise yourself with the terms and conditions.
- Step 3: Fill in the application
Fill in the application form provided by your credit card issuer. Provide accurate personal and financial details as requested.
- Step 4: Provide the necessary documents
Submit necessary documents required by your credit card issuer with your application.
- Step 5: Wait for approval
Once you have submitted your application and documents, the credit card issuer will assess your request. If approved, you will receive confirmation along with the loan terms and conditions. The sanctioned loan amount will be disbursed to you through an ECS transfer to your account or via a demand draft issued by the bank.
Documents needed for a loan against a credit card
In most instances, obtaining a loan against a credit card involves minimal documentation. This streamlined process is attributed to the prerequisite of already possessing a credit card, which entails submitting necessary documents during the credit card application. Over the time, as you cultivate a positive relationship with your bank through credit card usage, securing a loan against your credit card becomes more accessible. Nevertheless, when initially applying for a credit card, you are required to present the following documents:
- Identity proof
- Copy of address proof
- Recent passport-size photographs
- Copy of the office ID card (for salaried employees)
- Last three months’ salary slips (for salaried employees)
- Copy of PAN card (for self-employed applicants)
- Attested copy of the latest ITR (for self-employed applicants)
Read also: What are the best credit cards to use for paying rent?
Eligibility for taking a loan against a credit card
If you are a credit card holder in need of funds to address urgent or unforeseen expenses, obtaining a loan against your credit card is a viable option. However, certain eligibility criteria must be met before applying for such a loan:
- You should be an existing customer of the credit card’s bank. Only a few banks extend this facility to new customers.
- Possession of a credit card is mandatory for the borrower.
- A good credit score and a commendable track record of credit repayment are essential prerequisites.
Before initiating the loan application process, it is advisable to thoroughly review your credit history. This can be accomplished through mobile banking, internet banking or by visiting your nearest bank branch. Additionally, it’s crucial to note that borrowing a loan exceeding your credit card withdrawal limit, against the unused limit of your credit card, may lead to the temporary suspension of your credit card for further use. This restriction remains in effect until your loan account balance decreases, and the remaining loan amount is lower than your credit card withdrawal limit.
Benefits of loan against a credit card
Choosing loan against your credit card offers several advantages, including:
- Quick disbursement: These loans are promptly approved and disbursed, streamlining the process without the need for extensive documentation.
- Low interest rates: Loans against credit cards generally come with low-interest rates, making them a cost-effective financing option.
- Direct transfer: The loan amount can be directly transferred to your bank account, providing convenience in utilising the borrowed funds.
- Instant access: You can instantly access the loan amount upon request, ensuring prompt financial support.
- Convenience: You have the flexibility to apply for this type of loan from any location and at any time.
- Easy application: The application process for these loans can be completed over the phone or online through a few straight steps.
- Minimal processing fee: These loans involve minimal processing fees, reducing the overall cost of borrowing.
- Long loan duration: Loans against credit cards are typically sanctioned for a duration of 24 months (two years), providing a reasonable repayment period.
- Monthly instalment repayment: Borrowers can conveniently repay the loan amount through easy monthly instalments, billed directly to their credit card each month.
Things to consider before taking a loan against a credit card
While a loan against a credit card can be a convenient financial tool, there are some critical considerations:
- Interest rates: Credit card loans often come with high interest rates compared to traditional personal loans. It’s important to be aware of the interest charges and ensure that you can comfortably afford the repayments.
- Credit limit impact: Borrowing against a credit card can reduce the available credit limit, potentially affecting your ability to make other credit card transactions. It’s crucial not to max out your card’s limit.
- Fees and charges: Check for any transaction charges, processing fees or penalties associated with the loan. These additional costs can accumulate, affecting the overall affordability of the loan.
- Credit score impact: Defaulting on loan repayments or consistently using a credit card for loans can have a negative impact on your credit score. Timely repayments are essential for maintaining a good credit history.
- Alternative financing options: Explore other financing options, such as personal loans or borrowing from family and friends, to see if they offer better terms and lower interest rates. Evaluating alternatives can help you make an informed decision about the most suitable financial solution for your needs.
FAQs
How do credit card loans function?
When you engage in a cashless transaction using your credit card, you essentially borrow from the issuer. Similarly, you can obtain loans based on your credit limit, incurring a specific interest rate for the borrowed amount.
Is it advisable to take a credit card loan?
The decision to take a loan against a credit card depends on various factors, such as your current circumstances, urgency for cash, and the required loan amount.
What are the drawbacks of credit card loans?
Credit card loans typically entail higher interest rates, and failing to repay the debt promptly may result in significant penalties.
Can every credit cardholder access credit card loans?
No, eligibility for credit card loans is determined by specific criteria set by issuers. This facility is extended to selected cardholders based on their credit repayment history and standing.
What factors influence my eligibility for credit card loans?
Issuers grant this loan to cardholders with excellent credit ratings and commendable credit repayment histories. Improved income levels over the years positively impact your eligibility.
What documents are needed to apply for a credit card loan?
Most credit card loans are pre-approved and require no collateral. Therefore, there is no need to submit any documents when applying for a credit card loan.
What additional charges apply to credit card loans?
A processing fee is charged, and opting to foreclose the loan may result in a pre-payment penalty.
How does a credit card loan differ from cash withdrawal using a credit card?
The primary distinction lies in the cash withdrawal limit, which is lower than that of a credit card loan. Additionally, the interest rates for cash withdrawal are typically higher than those for credit card loans.
| Got any questions or point of view on our article? We would love to hear from you. Write to our Editor-in-Chief Jhumur Ghosh at jhumur.ghosh1@housing.com |
