Things to consider before signing on the dotted line

A loan is a bridge that can connect our dreams with reality. In addition, the liquidity it provides can rescue us from the most serious crises. However, to ensure a smooth journey, you must choose the loan product that best meets your needs and implement plans to intelligently manage debt for the life of the loan. Some loans address specific needs, such as a home loan that finances the purchase of a property and an education loan that finances higher education. Other loans are versatile and can be used for any use. Usually these are unsecured loans, the most popular among them is the personal loan. But the market these days also has a range of lesser-known credit products, such as pre-approved loans tied to credit cards and payday loans that may prove viable financing alternatives. The key, however, is understanding how these fairly sophisticated products work to maximize loan returns.

In this article, I have focused on pre-approved loans linked to credit cards, I have discussed their characteristics and fundamental aspects that a borrower should consider before applying for one.

What is a pre-approved loan linked to a credit card?

As its name suggests, this financing instrument is linked to a credit card and comes pre-approved with a defined upper limit for the loan amount. Once the loan is disbursed, the refund EMIs are added to the credit card bill each month. These unsecured loans, which can be used for any purpose, require little or no documentation (as they are provided via credit card) and therefore involve a quick payout. However, their interest rates are usually higher than those of a normal personal loan, which requires additional documentation and can take a few days to process the application. So, should you apply for a card-linked loan? Read on to find out.

Exclusive product for preferred customers

The first thing to know is that not all credit card users receive offers for pre-approved loans. Lenders make these loans only to clients who they say score highly on various aspects of creditworthiness. In addition, different clients can be offered similar loans but with different interest rates depending on their payment behavior, among other considerations. So, if you’ve been consistently disciplined with your credit card refunds, your card issuer likely has a loan offer just for you. Check promotional emails or SMS sent by your bank, log into your online banking portal and look for deals in the credit card section or call or email your bank customer service for more details.

The loan is tied to the credit limit of your credit card.

While most of these loans are tied to the credit limit of a particular credit card account, certain banks offer such loans that are separate from the user’s credit limit. This should be an important consideration because if the pre-approved loan is tied to the card’s credit limit, the maximum loan amount will be within that threshold, and more importantly, the credit limit will be locked to the extent of the amount. of the loan. That is, your card’s credit limit will be released for other credit card expenses as you continue to pay the EMIs on your loan.

On the other hand, if the loan is not tied to your credit limit, you can fully use your credit limit for regular card expenses without having to worry about the loan amount being related to it, for which there will be an account separate loan. However, the EMIs for both types of loans will be combined with your monthly credit card bills, which must be paid in full within the due dates to avoid additional interest charges and late fees.

Interest rate, processing fee, and loan offer tenure

Pre-approved loans linked to credit cards typically charge interest between 12% and 29% per year, depending on the credit profile of the card user, income stability and the type of financing offer. Also, these are short-term loans with a maximum tenure that generally does not exceed 36 months. However, there are loan products offered by certain credit card issuers that can provide a maximum term of 48 months. In most cases, lenders charge a one-time processing fee during loan disbursement, which is a fraction of the loan amount (such as 2 percent) or a fixed amount (such as Rs 500).

Mostly zero documentation and fast payout

They call it pre-approved for a reason. Since these loan products are tied to your credit card account, they typically don’t involve any additional documentation, making them one of the fastest ways to raise money. Loan disbursements can take only a few hours and often come to the urgent rescue of the cash-strapped borrower facing a financial emergency.

Before making a final decision, here are a couple of things to think about:

Loan affordabilityGet full clarity on how much interest charges will be on your credit card linked loan and assess the affordability of the added burden your EMIs will have on your credit card bills before signing on the dotted line. If you don’t pay your combined credit card bill on time, you will have to fork out more additional interest charges and late fees that can lead to avoidable debt and financial stress, as well as damage your credit score.

Loan amount and tenure: You can only get a limited amount through loans tied to credit cards. If your requirement is higher, you may want to consider applying for a regular personal loan that might even charge less in terms of interest (if you have a strong credit score and stable income) and offer you a longer loan tenure ( up to 60 months). But personal loans can involve slightly stricter eligibility rules, additional documentation, and loan disbursement can take a few days.

Other options: Another loan product, in addition to a personal loan, that you can check out is a payday loan (also called a microloan). These products are generally offered through the lenders’ mobile apps, they involve basic documentation (such as pay stubs and other usual identification documents), and the loan amount generally does not exceed Rs 1 lakh. More importantly, these are ultrashort loan products (with a maximum tenure of between 3 and 6 months) and interest rates that range from 0.08 to 2 percent per day, apart from a processing fee. Late fees can also go up as much as 4 percent per day.

In conclusion, pre-approved loan offers, in addition to the usual card benefits like cash back, redeemable reward points, easy EMIs, complimentary travel insurance, etc., make credit cards an extremely convenient financial tool. And if you are eligible for one, a pre-approved loan can provide quick liquidity to address any requirement you may have, from financing international travel to addressing an emergency. However, you should also look at the cost of borrowing and whether the loan meets the loan amount and tenure requirements. Above all, just like any other loan, you need to make sure you can pay it off on time without having to commit to other essential financial commitments like rent, food, children’s education, insurance, and transportation.

Read the columns of Adhil Shetty here.

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