A loan against a credit card is an unsecured loan that comes with a fixed rate of interest over a set tenor. The interest rate is usually lesser than the prevalent rates on credit card transactions. Under this, the maximum loan amount one can avail of usually does not exceed the credit limit on the card, though it may not always be the case.
It’s important to note that a loan against cards is not the same as an increase in the credit limit or a way to withdraw cash through credit cards, Adhil Shetty, CEO of Bankbazaar told CNBC-TV18.
“The amount received as the loan is offered to the customer in the form of a demand draft or through a direct transfer to the bank account,” he added.
It helps borrowers who need immediate funds to deal with urgent and unpredictable personal situations but the withdrawal limit on these cards is not sufficient to fund the financial requirements.
According to Ranvir Singh, Co-founder and MD of Kissht, loans against credit cards offer one of the few reliable ways to borrow money during the ongoing COVID-19 second wave as it can readily provide liquidity.
Having said that, those undergoing any kind of shortage can opt for it. Though, there are certain limitations that are essential to understand.
"Also, these loans are at the discretion of the bank and unless customers have a very good credit history and score, they may not be able to avail of this loan. At times, the interest rate on these loans could also be higher than personal loans. While not all card issuers block the credit limit of the card once the loan has been taken, there is a chance that the credit limit could be lower until borrowers pay off the loan in part or full," Shetty of Bankbazaar explained.
Given that, Abhishek Soni, CEO and Co-Founder of Upwards suggested that borrowers should first consider personal loans and when that is not possible then only they should go for credit card loans.
"Personal loans are more advisable if customers need funds beyond their savings as compared to any other form of borrowing. Borrowing from friends/extended family is not ideal in such times as everyone is cash strapped and will not be comfortable to give an informal loan," Soni said.
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(Edited by: By Ajay Vaishnav)
First Published: IST