Credit Cards are an integral part of our financial lives today. They allow us quick access to financial credit in case of emergency, provide an interest free period of 20–50 days and also help us improve our credit score steadily. Through various offers attached to a credit card, like cashback, reward points etc. they may enable us to reduce transaction cost over the long period of time.
The problem begins when we start using credit cards to finance our lifestyle needs in an undisciplined manner. You start transacting more than what you can afford and fail to clear your total dues every month. With your outstanding balance attracting interest costs of 20–47% p.a., it reaches a point where even the payment of minimum amount due becomes difficult. You find yourself in what is known as the example of a debt trap where the only solution is to avail a lower-cost loan option to repay your credit card debt. Of the various options available to come out of such card debt traps, personal loan has come as one of the most convenient and relatively cheaper options.
Why personal loans for paying off your credit card balance?
- Due to low interest rates: Personal loans charge significantly lower interest rates than credit cards. While your credit card balance will attract an interest rate of 20-47% p.a., personal loan interest rates will vary between 10–25%. A lower interest rate not only reduces your overall payable interest, but also helps in faster debt repayment.
- Quick disbursal: Personal loans have the fastest disbursal procedures among all loan options available. While some banks claim to disburse personal loans within 2-4 days, most personal loans are disbursed within a week if documentation and eligibility conditions are easily done.
- Comfortable repayment options: Unlike credit cards where the outstanding dues have to be paid within the due date to avoid heavy interest cost and penalties, personal loans allow you to spread your repayment in small and equal installments for 1–5 years. This installments are known as EMIs and can be fixed on the basis of your monthly cash. You can easily find your EMI amount by using various personal loan EMI calculators available online.
- Compare interest rate offered by various companies: The entire purpose of taking a personal loan for paying your credit card debt is to reduce your interest cost. The interest rate of personal loans can vary widely across banks. Some banks charge personal loan interest rates starting from 18.50% p.a., while the interest rates by others start from around 11.50% p.a. Even as a small difference in your interest can lead to a large difference in your EMIs and overall interest cost, so make sure to compare the interest rates offered by various lenders.
- Enquire about converting your credit card dues to EMIs: Mostly, credit card issuers allow their cardholders to convert their card outstanding into EMIs. The minimum amount required for such conversion can be as low as Rs 3,000. Before taking a personal loan, make sure to contact your credit card issuer about the rate of interest, tenures and processing charges applicable in conversion to EMI. Opt for such conversion method if the rates and other features offered are more attractive than those offered by personal loan products available to you.
- Compare conditions and charges related to prepayment: Mostly, lenders place restrictions on prepayment of personal loans. While most banks do not allow prepayments of loan before the completion of a specified period, some bank do not allow part pre-payment at all. While most charge prepayment charges of 2% to 5% of the amount prepaid or outstanding principal, some do not penalize prepayments. Consider a lender that does not charge any prepayment penalty as it will allow you to use future windfall receipts or bonuses for prepayments without incurring any extra charge.
- Never hide your existing debts or outstanding during loan applications: People often try to understate their existing debt in the hope of getting a higher amount. However, they fail to realize that issuers will anyway fetch out their credit report before approving their loan application. The credit reports list all your existing and past debt obligations and repayments, including your all credit card dues. Such understatement can also lead to the rejection of your application. While one should never use his credit card in a manner that he cannot repay the bill amount by the due date, but in case, someone gets stuck in a situation with a heavy credit card bill, which is beyond his capacity, a personal loan can prove to be a better and cheaper option to come out of the debt trap.