Credit Card Loans Explained: How They Work And What To Check Before You Borrow

As monthly budgets come under pressure from rising expenses, credit card loans have gained popularity as a convenient solution to meet short-term financial needs. For many, they’ve become a go-to option to manage urgent expenses with speed and flexibility.

However, what exactly is a credit card loan, and is it the right choice for you?

A credit card loan is a pre-approved loan offered by your credit card issuer. It differs from the outstanding balance on your card. Instead, it is a fixed amount that can be directly transferred to your bank account or used to cover large expenses. Repayment is made through equated monthly instalments (EMIs).

One key benefit is there’s no documentation or approval process involved. The bank already considers you eligible based on your card usage and repayment history. The loan amount usually depends on your credit limit and profile.

Interest rates on credit card loans usually range between 12% and 24% per annum, lower than the 36% to 42% charged on unpaid card balances, but higher than many personal loans. The tenure ranges from 12-60 months, and the EMI is fixed at the time of taking the loan.

If you need funds urgently and don’t want to go through the paperwork of a personal loan, a credit card loan could be a quick fix. It is also useful for large purchases or medical emergencies, especially if you don’t want to disturb your long-term investments.

But this option comes with some downsides. First, these loans are unsecured, so any missed payments can hurt your credit score. Secondly, the effective cost may be higher than it appears, especially if there’s a processing fee or prepayment charge. Also, taking a loan reduces your available credit limit, which can impact your credit utilisation ratio—a major factor in credit score calculations.

Apart from interest charges, additional fees can increase your overall loan cost. Many credit card issuers generally charge processing and EMI conversion fees for such loans.

It is advisable to compare it with other available loan options. If your credit score is good, a personal loan from a bank or fintech platform may offer better terms.

Overall, a credit card loan can help to meet a short-term cash crunch, but it must be used with caution. It is important to understand the interest rates, fees, and potential impact on your credit score before opting for one. When used responsibly and supported by a solid repayment plan, it can serve as an effective financial tool.