How Personal Loan Can Help You Escape Credit Card Debt Trap
If you are saddled with credit card debt, availing personal loan to repay your credit card bills at once may be the smart move for you, here’s how:
1.It lowers the interest burden
It is a known fact that the interest rates levied on the outstanding credit card bills are sky-high. These interest rates, also known as finance charges, can go as high as 46% per annum. Besides the finance charges, credit card companies also levy late payment charges on the outstanding balances. Availing personal loan is more cost-effective as its interest rate ranges anywhere between 10.99% and 24% per annum. The amount you save by paying lower interest amount on personal loan could be used in repaying your mount of debt faster.
2.It makes debt repayment easier
It is much easier to concentrate on one big debt payment instead of multiple smaller bills at the same time. If you are juggling with multiple credit card debts, availing personal loan to repay your outstanding credit card balance will be quite helpful for you. Even though you have an option to convert your unpaid credit card balances into EMIs, doing so on multiple cards will lead to multiple EMI schedules and variable rates, which will complicate things further for you.
Consolidating multiple credit card payments with a personal loan will make you feel less overwhelmed as now you will be liable for a single loan payment. It will also help you focus better on the loan repayment since now you will have only one single interest rate, payment date and EMI (Equated Monthly Instalment) to deal with. Moreover, you will also enjoy flexible loan repayment tenure ranging from 1 to 5 years.
3.It restores your card’s interest-free period
Interest-free period is a benefit that comes with every credit card. It is referred to the period between the credit card transaction date and the credit card bill due date. And usually ranges from 45 to 50 days. During this period the credit card companies do not charge interest on new purchases. But this benefit can be enjoyed until the amount on your current and previous bill statements are paid off by the due date. Failure to do so will attract finance charges on all credit card transactions until the outstanding amount is paid off. Repaying your existing credit card dues through personal loan will allow you to enjoy interest-free period and other credit card benefits. Also, the credit limit that was locked in the form of outstanding balances will now be available to you. You can keep this limit as a financial backup to be used carefully where and when required.
Repaying your credit card debt through a personal loan? Keep these things in mind
If you have decided to repay your credit card dues through a personal loan, keep these few things in mind:
• Avoid applying for personal loan directly
Whenever you apply for a loan or credit card, lenders fetch your credit report from credit bureaus to assess your creditworthiness. Such requests made by lenders to credit bureaus are known as hard enquiries. Each hard enquiry made by a lender gets reported in your credit report and such multiple enquiries in a short span of time can project you as a credit-hungry individual, thus cutting your credit score by a few points and thereby your loan eligibility.
Instead for applying for a personal loan directly, visit online lending platforms and as per your eligibility compare various personal loan offers and apply for personal loan accordingly. You can even request these online lending platforms to fetch your credit report on your behalf from the bureaus for free. Such enquiries, known as soft enquiries, will not hurt your credit score.
• Select the loan tenure as per your repayment capacity
Your personal loan tenure plays a significant role in deciding your loan EMI and the overall interest payable. Choosing a longer loan tenure will result in smaller EMIs but will incur higher interest cost. On the other hand, choosing a shorter loan tenure will result in bigger monthly payouts but will incur a lesser interest amount. Keeping this point in mind, choose your loan tenure on the basis of your loan repayment capacity. Avoid aggressive repayment schedule as failure to keep up with it will further increase your debt burden through late payment penalties. Missing out or delaying loan repayments will also negatively impact your credit score.
• Compare alternative options as well
Besides personal loan, there are other loan options as well which you can consider. Secured loans such as loan against property, gold loan and loan against securities have interest rates lower than the interest rate applicable on personal loans. Most credit card companies also offer credit card balance transfer option to their customers. This option has a promotion period during which the cardholders are either charged nothing or low rate of interest for the duration of about 6 months. You can also consider converting your credit card dues into EMIs, provided its interest rates are significantly lower than the current finance charges. Hence, before applying for a personal loan, visit an online lending platform to compare different loan options. Also, enquire with credit card companies for offers available on EMI conversion and balance transfer.
• Consider redeeming returns from your investments
The returns on equity and mutual funds can go beyond your loan interest rates during thriving market conditions. Unless your existing investments are not allotted for short-term monetary goals, you can redeem them to pay off your credit card debt. You can also consider redeeming your fixed-income investments such as fixed deposits. As much as possible do not touch your emergency funds to pay off your dues because you should have a strong cushion to support you in the event of an unforeseen financial emergency. In such turbulent times, not having an emergency fund would force you to apply for pricier loans.