With credit cards in our wallets, we have the choice of spending even if we don’t have any funds at our disposal. Nevertheless, we wrongly think about credit cards to be an extension of our income and hence, wind up spending more than what we can repay.Worse still, the impressive balance remains to grow at a fast rate because of high rate of interest imposed by the credit cards (this can be as high as 45%). This is when we explore options to come from the burgeoning financial obligation trap. Individual loan is typically hailed as one of the most feasible choices to pay off charge card fees.
Why you should consider availing personal loan to settle your charge card dues
Low interest rates: The interest rate on personal loans is considerably lower than the interest rate charged by credit cards. While rate of interest on charge card impressive can be as high as 45%, loan providers charge 11.5-24% interest rate for individual loans.
Much easier to manage payments: With outstanding balances on two or more credit cards, you will need to keep an eye on numerous exceptional payment amounts and due dates in a month. On the contrary, taking a single personal loan to pay off numerous credit card balances consolidates the financial obligation and decreases the hasslefor the unrestrained lot amongst the charge card holders.
Versatility in fixing the period and EMI: Personal loans likewise permit you the option of fixing the period of your loan according to your own payment capacity. Unlike credit cards where the impressive balance has actually to be paid at one go to avoid interest payment and penalties, the payment of individual loan is made over a duration of time, varying from 1 to 5 years. This allows you to properly plan your repayment.
Exactly what you mustkeep in mind while getting personal loans for repaying charge card fees
Credit score: As individual loans are normally unsecured loans, lenders easily approve individual loans to individuals with high credit rating. Otherwise, they charge a greater rate of interest or may even decline the loan application. For this, you need to ensure that you keep paying the minimum amount due on your charge card. Else, it will reveal us as delayed payment in the records therefore affecting your credit ratingcredit rating. Building up a credit card debt after consistently cannot pay the dues decreases your credit scorecredit rating, which in turn reduces the possibility of getting personal loans at lower rates or even the approval of your loan itself.
Loan Period: Your loan period will play a significant function in identifying the size of your EMI. A longer period will imply smaller sized EMI but it will also result in greater interest cost. The reverse is realholds true forloans of much shorter tenure. OptChoose a short-tenured loan, depending upon your repayment capability and anticipated future revenue circulations.
Interest rate: The whole reasoning of taking a personal loan is to change the high interest-cost credit card charges with lower interest-rate individual loans. For example, Platinum Reserve Credit Card from American Express draws in an interest rate of 40.2% pa (3.35% monthly) while HDFC Bank charges rate of interest in the range of 15.75% to 20% pa on its individual loans. As a little difference in interest rate can amount to considerable distinction in your EMIs, compare the rate of interest charged by various lenders and rates on other offered choices, such as conversion of the charges into EMIs and loan against FD.
Prepayment charges: Lots of banks do not permit prepayment of personal loans until the completion of a pre-specified period. A lot of lenders also have prepayment charges, which typically vary from 2% to 5% of the impressive principal. Opt for a personal loan from a lender that does not charge any prepayment penalty, particularly if you anticipate cash inflow in future. This will allow you to settle your outstanding balance from any windfall receipts or bonus offers without sustaining extra charge.
Returns from existing investments: If yourexisting financial investments are supplying a lower rate of return than the rate of interest charged on your individual loan, it will make more sense to redeem/exitthose financial investments and use the proceeds to pay off your charge card debt.However, do not use your emergency funds or investments made for certain monetary goals to pay off your credit card debts.
To summarize, it is always a better idea to settle your monetary debt in one go if you can afford it. Choose for a personal loan just if you think that your credit card debt as ended up being too huge to be paid within a month or two. Keep in mind, a personal loan is likewise debt that has actually to be paid back. It is crucialis very important for you to alter your spending habit that lands you with an uncontrollable financial obligation in the first place.
Naveen Kukreja is CEOamp; Co-founder Paisabazaar.com