Loans against credit cards have emerged as game changers in the financial industry!

For cardholders in immediate need of funds, their plastic companions (credit cards) provide them with financial aid quickly and conveniently.

Being an innovative initiative in the financial help industry, loans against credit cards help cardholders unlock the hidden benefits of credit cards.

This blog aims to provide you with all the information regarding loans against credit cards including how they work and their advantages and disadvantages.

What are Loans Against Credit Cards?

Credit cards as financial instruments have come a long way from their inception in the mid-20^th century.

Originally, credit cards were designed as only a method of payment that is convenient to the user but with the fast-paced world of today, credit cards also offer additional benefits like cashback offers, rewards programs, and most recently the ability to secure loans for its users.

Throwing some light upon the concept of loans against credit cards or cash advances, it can be said that it is a form of a pre-approved personal loan.

Loans against credit cards are essentially pre-approved loans that are given to a user against their existing credit card limit.

As it is a pre-approved loan and not a traditional loan, it does not require the user to fill up any application form and wait for the entire approval process.

Loans against credit cards leverage the creditworthiness of the user by analyzing their past credit history available with the financial institution whose credit card they have.

Based on the creditworthiness, the user is offered a loan amount limit quickly and efficiently which is dispersed immediately.

How Do Loans Against Credit Cards Work?

Getting financial aid as loans against credit cards is a fairly straightforward process.

Sometimes, card-issuing financial institutions offer their users deals with a pre-decided maximum loan amount that the user can avail.

In such cases, the user only has to fill in basic details like contact details and credit card number and check their eligibility for the loan.

If the user is eligible for the loan, they can simply choose the repayment tenure and submit to avail the immediate disbursement of the loan amount.

In other cases, the user can approach the credit card issuer’s bank and request a loan against credit card.

As the issuing bank already has an account of the user’s creditworthiness from the time when the credit card was issued to them, they do not require any additional documentation.

As a result, the loan is swiftly approved and the funds are either immediately disbursed in the user’s account or they receive a draft which they can encash immediately.

Further, loans against credit cards are repaid in the form of fixed monthly installments (EMIs) over a fixed period chosen by the cardholder.

Growing Trend Of Loans Against Credit Cards

In the modern era of today, several factors have contributed to the growing trend of loans against credit cards.

Some of these factors include –

• Digital Transformation – Today, digital transformation is overpowering the financial industry with UPI payments and cardless transactions and it is not incorrect to say that credit card issuers have been the leaders in this change. With today’s generation being extremely tech-savvy, the seamless integration of technology with financial institutions leads to efficient and quick processing as well as disbursement of loan applications.
• Need For Emergency Funds – One of the major reasons for users applying for loans against credit cards is the rising need for emergency funds in today’s generation. With people earning enough to survive, they often need extra funds for emergencies that may include home repairs, medical, or any other expense that can also be paying off the outstanding amount of a credit card. As loans against credit cards are quick and immediate, they can be a lifesaver to a user in dire need of the money.
• Consumer Preferences – The generation of today has minimum time to visit banks and follow the tedious process of loan application and approval. Stuck in the office and trying to find an appropriate work-life balance, the people of today hold high regard for services that are convenient and simple. Hence, hassle-free loan approval and disbursement appeals to users looking for a straightforward loan experience.

Advantages of Loans Against Credit Cards

Loans against credit cards offer a lot of advantages to the users. Some of them are –

• Speed & Convenience – The most significant advantage of loans against credit cards is the speed and convenience with which they are offered, approved as well as disbursed. This serves as a lifesaver when the user is in immediate financial need as against the tedious traditional method of loan approval and disbursement.
• No Additional Documentation – As the bank issuing the loan against the credit card already verified the creditworthiness of the user while issuing them the credit card, they do not need any additional documentation to re-evaluate the user’s creditworthiness. This saves the user from the hassle of gathering and submitting various documents to get the loan approved.
• Flexible Repayment Options – It is up to the discretion of the user to decide upon the tenure of the repayment depending upon the monthly installment amounts and their financial stability. The usual tenure period for loans against credit cards ranges from 1 to 5 years, where the monthly installment is highest for 1 year (though total interest charged is the least) and lowest for 5 years (with a high total interest being paid).

Disadvantages of Loans Against Credit Cards

Loans against credit cards are not free from the flaws that they entail. Some of the flaws or disadvantages of loans against credit cards include –

• High-Interest Rates – Compared to other forms of secured loans, loans against credit cards charge a higher rate of interest from the users. With an increase in the tenure of the loan and a decrease in the monthly installment amount, the interest payable increases manifold.
• Fees & Charges – The issuing bank may also charge a processing fee, prepayment charges, and late payment fees from the user in addition to the high interest rates. This adversely affects the overall loan cost.
• Credit Utilization Impact – Mostly, the loan is offered from the available credit card limit of the user. This implies that the higher the amount of loan that you avail, the lower available credit limit will be left on your card.

Conclusion

Loans against credit cards serve both as a boon and a bane to a cardholder.

It may help the user to come out of a debt spiral and pay up the outstanding expenses but the ease of getting the loan can push the user back into a more heavy and burdened debt spiral.

Therefore, it is advised to carefully measure the pros and cons of taking loans against credit cards according to your financial stability and suitability before actually taking the loan!