Sep 23, 2020 ●10 min read
Things To Keep In Mind While Availing A Personal Loan To Pay Your Credit Card Bills
With credit cards in our pockets, we have the purchasing power even if we don't have any funds at our disposal. However, we mistakenly see credit cards as an extension of our income and thus, end up spending more than what we can afford to repay. Worse case is, the outstanding balance continues to increase at a rapid pace because of the high rate of interest levied by credit cards (this can be as high as 45%). We see the same situation in any other loan. People get stuck in the loop of repaying old loans and credits by acquiring new loans, as a result accumulating huge liabilities.
Why must you think about availing a personal loan to pay off outstanding liability or your credit card dues?
Low rate of interest: The rate of interest on personal loans is considerably less than the interest rate charged by credit cards. Whereas interest rate on credit card outstanding can go upto 45%.
Easier to manage repayments: With outstanding balances on more than two credit cards, you'll have to keep track of multiple outstanding amounts and due dates accordingly. On the contrary, taking one personal loan to pay off multiple credit card balances pays the debt.
Flexibility in fixing the tenure and EMI: Personal loans also assists you in fixing the credibility of you towards the lender along with your repayment capacity. In contrast to credit cards where the outstanding balance has to be paid at one go to avoid interest payment and penalties, the repayment of a personal loan is created over a period of time, starting from one to five years. this permits you to properly arrange your repayment.
Otherwise, they charge a higher rate of interest or might even reject the loan application. For this, you would like to make sure that you simply keep paying the minimum amount due on your credit card. Else, it'll show us as delayed payment in the records thereby affecting your credit score. Accumulating a credit card debt once repeatedly failing to pay the dues lowers your credit score, which successively reduces the chance of availing personal loans at lower rates or perhaps the approval of your loan itself.
Loan Tenure: Your loan tenure will play a significant role in deciding the dimensions of your EMI. An extended tenure will mean smaller EMI however it'll additionally result in higher interest cost. The reverse is also true for the loans of a shorter period. Select a short-tenured loan, depending on your repayment capability and expected future money flows.
Interest rate: The entire rationale of taking a personal loan is to interchange the high interest-cost credit card dues with lower-interest-rate personal loans. For example, platinum Reserve credit cards from American Express attract a rate of interest of 40.2% p.a. (3.35% per month) whereas HDFC Bank charges an interest rate in the range of 15.75% to 20% p.a. on its personal loans. As a little distinction in interest rate can amount to a sizable difference in your EMIs, compare the interest rates charged by various lenders.
Prepayment charges: Many banks don't permit prepayment of personal loans till the completion of a pre-specified period. Most lenders also have prepayment charges that typically vary from 2% to 5% of the outstanding principal. pick a personal loan from a lender that doesn't charge any prepayment penalty, particularly if you expect cash inflow in the future. this may allow you to pay off your outstanding balance from any windfall receipts or bonuses without incurring additional charges.
Returns from existing investments: If your existing investments are providing a lower rate of return than the rate of interest charged on your personal loan, it'll make a lot of sense to roll back investments and use the returns to pay off your debt.
To add up, it's always a better plan to pay off your financial debt in one go if you'll be able to afford it. opt for a personal loan given that you think that your credit card debt has become too massive to be paid within a month or two. Bear in mind, a personal loan is also a debt that must be paid. It's vital for you to alter your spending habit that lands you with unmanageable debt in the 1st place.