Eyeing credit card loan against your limit? Top 5 facts that you must know

Your credit card can be a useful tool to kill the financial heat you might be facing during the Coronavirus lockdown because it comes with a specified pre-approved credit limit.

The credit card holder repays this loan through Equated Monthly Installments (EMI) for a specified tenure chosen. Photo: Reuters

Your credit card can be a useful tool to kill the financial heat you might be facing during the Coronavirus lockdown because it comes with a specified pre-approved credit limit, which can be further used for other purposes including loans. So, if you are in urgent need of cash, most banks offer the facility of loan against credit card limit. Here, a card holder can take a loan against the credit card limit. Once the bank approves loan request, the limit gets credited to bank savings account. Banks charge a certain interest rate for the repayment of the loan. The credit card holder repays this loan through Equated Monthly Installments (EMI) for a specified tenure chosen.

However, before applying for the loan against credit card limit, there are some facts liker higher annual interest rate to the tune of 24 per cent per annum and some hidden charges like GST, processing fee, no reward point, etc that one must know while applying for the loan. Various top banks offer loan against credit card. ICICI Bank, HDFC Bank, IDBI Bank, Kotak Mahindra Bank, IndusInd Bank, etc. are some of them.

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Highlighting about some facts on loan against credit card limit Manikaran Singhal, a SEBI registered tax and investment expert said, "One won't get reward points on repayment of the loan taken against credit card limit and first EMI will have interest levied from the date of booking of the loan to the date of first EMI payment. This means if someone has booked loan against credit card limit on 25th May 2020 and his credit card hit date is 21st, then his first EMI will fall on 21st June 2020 and hence he or she will have to pay interest of 21 days in June and 7 days in May 2020 means 28 days."

Asked about the top 5 facts that one must know while applying for loan against the credit card limit, Singhal listed out the following:

1] GST of 18 per cent: While repaying the loan against the credit card limit, banks generally charge 1.5 per cent to 2 per cent per month interest. Apart from this, an additional 18 per cent GST is levied, which is calculated on the interest payment. Means if one pays an EMI of Rs 1500 where Rs 1000 is principal and Rs 500 is interest then there will be an additional 18 per cent GST payment which will be calculated on Rs 500 interest.

2] Processing Fee: There is a processing fee involved in this type of bank loan which can be to the tune of 0.5 per cent of the net loan amount. this will be added in the first EMI payment.

3] Preclosure charges: If you want to close the loan account before the chosen period, then there will be preclosure charges that can be to the tune of 2.5 per cent to 3 per cent of the outstanding principal.

4] No reward point: Since, loan against credit card limit is not a transaction during any purchase, banks don't give any reward point on loan repayment. However, the reward point is made available on any transaction which is not paid in one shot but is paid in the form of EMI.

5] Can every card holder get loan on credit card? The answer is no. Every issuer has fixed eligibility criteria when it comes to loan on credit cards. This facility is offered only to select cardholders based on the credit repayment history and credit standing.

As it's clear from the above-mentioned facts, there are various charges involved in the loan against credit card limit. so, one should opt this type of collateral-free non-secured loan, if there is no other option or there is utter urgency and he or she doesn't have that much of time to opt for other bank loan.

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