A loan is a bridge that can connect our dreams to reality. Also, the liquidity it brings along can rescue us from gravest of crises. However, to ensure a smooth journey, you must choose a loan product that best suits your requirement and implement plans to smartly manage the debt throughout the loan tenure. Some loans address specific needs – like a home loan finances a property purchase and an educational loan funds higher studies. Other loans are multipurpose and can be put to any use. These are typically unsecured loans, the most popular among them is the personal loan. But the market these days also has a range of lesser-known loan products, like credit card-linked preapproved loans and payday loans that can prove to be viable financing alternatives. However, the key lies in understanding how these rather sophisticated products work so as to maximise borrowing benefits.
In this article, I’ve focused on credit card-linked pre-approved loans, discussed its features and critical things a borrower must keep in mind before applying for one.
What is a credit card-linked pre-approved loan?
As the name suggests, this financing instrument is linked to a credit card and comes pre-approved with a defined upper limit for the loan amount. Once the loan is disbursed, its repayment EMIs are added to the credit card bill every month. These collateral-less loans, which can be used for any purpose, require minimal to zero documentation (as they’re provided through the credit card) and hence involve quick disbursal. But their interest rates are often higher than a regular personal loan which involve additional documentation and might take a few days to process the application. So, should you apply for a card-linked loan? Read on to find out.
Exclusive product for preferred customers
The first thing to know is not all credit card users get offers for preapproved loans. Lenders extend these loans only to customers who, according to them, score highly on various counts to measure creditworthiness. Also, different customers may be offered similar loans but with different interest rates depending on their repayment behaviour among other considerations. So, if you’ve been consistently disciplined with your credit card repayments, chances are your card issuer has an exclusive loan offer for you. Check the promotional emails or SMSes sent by your bank, log on to your online banking portal and look for offers under the credit card section or call or email your bank’s customer care service for more details.
The loan is linked to your credit card’s credit limit
While a majority of these loans are linked to the credit limit of a particular credit card account, certain banks offer such loans that are hyphenated from the user’s credit limit. This should be an important consideration because if the preapproved loan is linked to the card’s credit limit, the maximum loan amount will be within that threshold and, more importantly, the credit limit will be blocked to the extent of the loan amount. Meaning, your card’s credit limit will be freed for other credit card spends as you keep repaying your loan EMIs.
On the other hand, if the loan is not linked to your credit limit, you can fully utilise your credit limit for regular card spends without having to bother about the loan amount having any bearing on it for which there will be a separate loan account. However, the EMIs for both these type of loans will be clubbed with your monthly credit card bills which must be cleared in full within the due dates to prevent additional interest charges and late payment fees.
Interest rate, processing fee and tenure of the loan offer
Credit card-linked pre-approved loans usually charge interest anywhere between 12% to 29% p.a. based on the card user’s credit profile, income stability and the type of financing offer. Also, these are short-term loans with maximum tenures usually not exceeding 36 months. However, there are loan products offered by certain credit card issuers that can provide a maximum tenure of 48 months. On most occasions, lenders levy a one-time processing fee during the loan disbursal which is either a fraction of the loan amount (like 2 percent) or a fixed amount (like Rs 500).
Mostly zero documentation and quick disbursal
They call it pre-approved for a reason. Since these loan products are linked to your credit card account, they usually do not involve any additional documentation making them one of the quickest ways to raise money. Loan disbursals can take only a few hours often coming to the urgent rescue of the cash-strapped borrower tackling a financial emergency.
Before taking a final decision, here are a couple of things you should ponder upon:
Loan affordability: Get complete clarity on how much the interest charges will be on your credit card-linked loan and assess the affordability of the extra burden its EMIs will have on your credit card bills before signing on the dotted line. If you miss repaying the combined credit card bill in time, you will have to shell out more in additional interest charges and late payment fees that can lead to accumulation of avoidable debt and strained finances apart from a damaged your credit score. Loan amount and tenure: You can only get a limited amount through credit card-linked loans. If your requirement is higher, you might want to consider going for a regular personal loan that might even charge less in terms of interest (if you have a solid credit score and a stable income) and offer you a longer loan tenure (up to 60 months). But personal loans may involve slightly steeper eligibility norms, additional documentation and may take a few days for the loan to get disbursed. Other options: Another loan product, apart from a personal loan, that you can check out is a payday loan (also called microloans). These products are generally offered through lenders’ mobile apps, involve basic documentation (like payslips and other usual identification documents) and the loan amount generally doesn’t exceed Rs 1 lakh. More importantly, these are ultra-short loan products (with maximum tenures between 3-6 months) and interest rates ranging between 0.08-2 percent per day apart from a processing fee. Late payment charges can also go up as high as 4 percent per day.
In conclusion, pre-approved loan offers, apart from usual card benefits like cashback, redeemable reward points, easy EMIs, complimentary travel insurance, etc. make credit cards an extremely convenient financial tool to have. And if you’re eligible for one, a pre-approved loan can provide quick liquidity to address any requirement that you might have – from funding an international trip to tackling an emergency. However, you should also analyse the cost of borrowing and whether such a loan meets your loan amount and tenure requirements. Above all, just like any other loan, you must ensure you’re able to afford to repay it in time without having to compromise on other essential financial commitments like rent, food, kid’s education, insurance and conveyance.
Adhil Shetty is the CEO of BankBazaar.com Read Adhil Shetty's columns