Credit cards have proved to be a boon for ordinary people when it comes to juggling financial obligations. Cardholders have the flexibility to go a little over their budget while making a purchase. It adds to the liquidity quotient of the economy by expanding the purchasing power of users. Credit cards come with a prespecified limit that can be used to make purchases and carry out cash advances. The recent innovations in the financial services industry have also made it possible to get a loan against a credit card. Read on to learn more about credit card loan and their benefits.
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What is a loan against a credit card?
A loan against a credit card is an unsecured loan exclusively offered to credit cardholders based on their credit limit and history. It is similar to a personal loan but not exactly like one. Since the loan is offered to existing customers, there are little to no documentation requirements. Contrary to a loan against a credit card, a personal loan has a standard documentation process, and applicants have to submit the necessary documents for approval of the loan. Some people often get confused between a credit card loan and a credit card cash withdrawal. However, it is not the case. It’s a loan offered to credit cardholders to meet their urgent financial obligations. The cash withdrawal limit on credit cards is often lower than the loan being offered.
Understanding Personal Loans
A personal loan is also an unsecured credit offered by financial institutions to help borrowers meet their financial obligations. The approval of a personal loan is contingent on different factors like repayment capacity of the borrower, income level, repayment capacity, nature of employment, stability of income, etc. Unlike a loan against a credit card, anyone can apply for a personal loan. Those who meet the minimum eligibility requirements and have the essential documents will be granted the loan amount. Most personal loans are multi-purpose loans which do not impose any restrictions on the borrower regarding the use of funds.
Difference between personal loans and loans against credit card
Personal loans and loans against credit cards do have some similarities. However, there are many differences which sets them apart. Let’s take a quick look into some significant differences between the two.
The documentation process for personal loans is lengthier than that of credit card loans. It is because the applicant has to submit a wide range of documents as per the lender’s requirements. This can include income proof, employment-related documents, ID proof, address proof, etc. However, a credit card loan doesn’t demand any documents since the prospective borrower (credit card holders) are existing customers, and all their records are submitted already.
2. Interest Rate
Usually, the interest rate charged on the unpaid balance on credit cards is higher. However, the interest rate for credit card loans is much lower than what’s typically charged. It can be in the range of 10% to 18%, depending on the borrower’s profile and repayment track record. However, the interest rate charged for personal loans is usually higher than for credit card loans. It can vary in the range of 13% to 22%.
3. Loan Tenure
Most credit cardholders opt for a credit card loan to meet urgent financial obligations. Since time is of the essence, credit card loans are a better choice given the low processing timeline. Therefore, these loans usually have a lower tenure than personal loans. On the other hand, the duration of personal loans can be much higher than credit card loans. Most loans against credit cards have a loan tenure of up to 24 months. However, the loan tenure for personal loans can be up to 60 months.
4. Loan Amount
The maximum loan amount for credit card loans is up to the maximum credit limit set by the lender. Therefore, those with a higher credit limit can opt for a bigger loan amount. However, in the case of personal loans, the amount offered is contingent on the applicant’s income and repayment capacity. Therefore, a lower income will make you eligible for a lower loan amount and vice versa.
Benefits of a loan against a credit card
A loan against a credit card has numerous benefits, making it the best alternative to a personal loan. Here are some prominent ones to learn about.
1. Pre-approved Loan
One of the biggest benefits of a credit card loan is that it is pre-approved. There is no need to undergo a complex document evaluation process to get the loan approval. It is ideal for time-sensitive financial obligations which require instant action.
2. Unsecured and Flexible
Another exciting benefit of a credit card loan is that it is unsecured and doesn’t require any collateral from the borrowers. As a result, borrowers don’t have to worry about their assets being confiscated if they fail to repay the amount timely.
3. Balance Transfer
The credit card balance transfer feature allows users to consolidate multiple loans into a single credit card loan and repay it using flexible EMIs.