Loan on your credit card: Should you opt for it?

Aparna received a call from a bank with which she has a credit card, offering her a 'loan on credit card'. Yes, loan on credit card! She assumed it to be a cash withdrawal facility on the credit card.

On further conversation with the phone banker, she realised that it is not the same as cash withdrawal on her card. So she decided to explore this loan option.

What is a loan on credit card?

Loan on credit card is similar to personal loans, but this is pre-approved, and it comes without the need for any documentation.

Even though a personal loan is among the quickest options for obtaining a loan, some bit of documentation is still required and hence it may take a couple of days at least for it to come through.

However, in case of a loan on credit card, there is no need for any documentation and hence it is the quickest source of unsecured finance.

Loan on credit cards is often mistaken for cash withdrawal on credit cards. The key difference is the interest rate charged -- interest on loan on credit card will be similar to or a few notches higher than that of a personal loan while interest on cash withdrawals tend to be much higher and also the limit on cash withdrawal could be much lower than that of the eligible loan amount on the credit card.

This facility may be best suited when there is an immediate/urgent need for cash and you cash withdrawal limit is insufficient to satisfy your need. Cash withdrawal on credit card can satisfy your need at the spur of the moment but it comes with a high interest rate.

Hence, it makes more economic sense to opt for loan on credit card vis-a-viz the cash withdrawal facility because the interest rate is lower and the loan disbursal is also quick because of no documentation needed. You will either receive a demand draft from the bank or a direct transfer to your bank account.

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Features

• Loan on credit card is akin to a personal loan with the advantage that there is no documentation involved as it is pre-approved. So disbursal is quick.
• Processing fee will be charged which would be a minimum of a particular sum or a percentage of the loan amount.
• The repayment will be in monthly installments and there would be a prepayment facility too with a charge on prepayment. The EMIs will be billed to the credit card every month.
• The loan can be for a maximum tenure of 24 months with slabs of 6, 12, 18 and 24 months.
• The rate of interest will be dependent on the type of card i.e. gold, silver and platinum and the credit profile of the customer. So managing your credit score and your credit history is key as the rate of interest quoted will take into consideration those factors.

Can every person having a credit card get a loan on the credit card?

Credit card issuers provide this facility to individuals having a good credit repayment history and a high credit standing.

If you have a good track record over the tenure for which you own the credit card, banks would provide you with this facility. In some cases, with improved income levels over the years a person could also upgrade his credit card from silver to gold for instance and increase his loan eligibility or request for a top up loan as well!

Banks such as HDFC Bank, Deutsche Bank and ICICI bank to name a few offer the loan on credit card facility and to check if you are eligible for the loan you need to call the customer care and get the details needed.

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What is the quantum of loan provided?

The quantum of loan on the credit card is dependent on the credit limit on the card which in turn is dependent on your income, repayment history and credentials. The quantum of loan generally tends to be higher than the cash withdrawal limit.

To the extent of the loan taken, most banks will block the cash withdrawal limit. So if the loan taken exceeds the cash withdrawal limit, your card cannot be used to withdraw any cash till the time the loan amount falls below the cash withdrawal limit. Also banks can block the credit limit on the card to the extent of the outstanding loan amount.

Should you opt for a loan on credit card?

Loan on credit card is an unsecured loan and hence the rate of interest will be higher than any secured loan. If you're looking for an unsecured loan, then it may make sense to find out from your credit card issuer, the rate of interest charged on the loan against the credit card and then compare the same against the interest charged on personal loans.

If the rate differential is insignificant and your need for cash is urgent, loan on credit card can be explored. Bear in mind that your cash withdrawal facility on the card will be restricted and also many a times the credit card limit will also be curtailed to the extent of the outstanding loan amount.

So your usage of the credit card will be constrained.