Borrowing against Mutual Fund Units

Credit cards can be an excellent money management tool when you use it for what you can afford. However, once you start using it beyond your means, your outstanding balance grows at a rapid pace due to high interest rate (as high as 47% p.a.), late payment fee and withdrawal of interest-free period. One of the best ways to pull yourself out such debt trap is to avail a personal loan and pay off your credit card dues in one go.

Here’s how personal loans help in getting out of credit card debt trap:

Low interest rates: The interest rates charged on unpaid credit card bills are probably the highest among all loan options. Their interest rates, popularly known as finance charges, can go up to as high as 47% p.a. Unpaid balances would additionally incur late payment fee of up to Rs 1,000 if the minimum amount due also remains unpaid. On the contrary, personal loan interest rate can range anywhere from 10.99%-24% p.a. depending your credit score, loan amount, job profile and other eligibility criterion. The savings made through lower interest cost of personal loan can then be used to repay your accumulated debt faster.

Easier to manage repayments: Availing a personal loan to repay your credit card debt is especially helpful when you have accumulated debt on multiple cards. While you can convert your outstanding balances into EMIs, multiple cards would mean multiple varying rates and EMI schedules. Availing a personal loan to repay multiple credit card debt will allow you to consolidate them for a single interest rate, date of payment, EMI and loan tenure of up to 5 years.

Benefit from interest-free period: This period refers to the period between the date of credit card transaction and the bill due date by which it needs to be repaid. This period can go up to 52 days depending on when you make the transaction. You do not pay any interest on your credit card transaction if you repay the entire outstanding bill by the due date. However, this facility gets withdrawn if you fail to repay your credit card bill by the due date. All fresh credit card transactions henceforth will attract finance charges till the unpaid bills are paid off. Thus, paying off your existing credit card dues through a personal loan will allow you to avail the various credit card benefits along with the restored interest-free period.

Things to keep in mind while availing personal loan to repay your credit card dues

Do not make direct loan applications with lenders: Lenders fetch your credit report from credit bureaus whenever you apply for a fresh loan or a credit card. Such credit report requests are considered as hard enquiry and bureaus may reduce your credit score by a few points for each enquiry. This will further reduce your credit score, and thereby your loan eligibility. Instead, visit online lending marketplaces for comparing various personal loan offers available on your credit score and making the loan application accordingly. While online lending marketplaces would also fetch your credit report from the bureaus, such enquiries are considered as soft enquiries and do not reduce your credit score.

Choose your loan tenure based on your repayment capacity: Your personal loan plays an important role in determining your EMI amount and your overall interest cost. A longer tenure will result in smaller EMIs, but at a higher interest cost while the opposite would be true for those with shorter tenures. Hence, choose your loan tenure based on your repayment capacity. Do not opt for an aggressive repayment schedule as failure to keep up with it would further push you into a debt trap through late payment penalties. Delayed repayments would also have a negative impact on your credit score.

Compare with other alternative loan options: Interest rates charged on other alternative loan options, especially secured loans like loan against property, top-up home loans, loan against securities and gold loan can be lower than those available on personal loans. Most credit card issuers also offer credit card balance transfer option to the existing card holders of other credit card issuers. Credit balance transfer offers come with promotion period during which the cardholders are charged NIL or low interest rate for up to 6 months. Similarly, card holders can also convert their existing dues into EMIs whose interest rates are substantially lower than the original finance charges.

Hence, visit online lending marketplace to compare the interest rate charged by various lenders on alternative loan options. Also ensure to enquire with your existing and other card issuers for offers available on credit card balance transfer and EMI conversion before making any personal loan application.

Returns from your existing investments: Fixed-income investments like FDs, debt funds, etc usually earn lower rate of returns than personal loan interest rates. However, returns from equity and equity mutual funds can exceed personal loan interest rates during booming market conditions.

Hence, redeem your debt or fixed income investments for paying off credit card dues unless they are not allocated for your short-term financial goals. Abstain from using your emergency funds as any unforeseen financial emergencies would force you to avail costlier loans.