Lack of awareness surrounding credit cards usually make many new and existing credit card users wrongly take credit cards to be a form of extended income, which makes them spend beyond their repayment capacity. This further makes such credit card users default on their credit card bills. Such continued defaults for various months clubbed with constant usage of credit cards to meet regular transactions makes their outstanding credit card dues grow rapidly owing to higher finance charges (up to 49% p.a) charged on credit cards.
One of the prudent ways to get rid of such morbid credit card debt traps is to opt for a personal loan. Personal loans, apart from being available by lenders and NBFCs, are even available through fast borrowing apps. A few of the best instant loan apps present in the market are MoneyTap, EarlySalary, PaySense etc. Such best instant loan apps claim to offer instant loans to meet situations of financial emergencies, fund mismatches, financial shortages to fund personal or business needs or to simply repay credit card debts. Besides this, there are even various banks and NBFCs that have come up with instant loan offers wherein they assure to sanction personal loans on the same day of loan approval. Thus, those looking to escape their credit card debt trap can first approach their bank or NBFC with whom they share an existing relationship as they may provide benefits in the form of lower interest rates, instant loans and other suitable offers. However, if you are turned down on an instant loan offer for a personal loan, then you can contact the above-mentioned instant loan apps to avail loan instantly. While such instant loan app platforms have a less stringent evaluation process as compared to banks, particularly PSUs, they may charge a higher interest rate for availing of personal loans. However, note that their charged interest rates will certainly be lower than the finance charges charged by credit cards on the non-repayment of outstanding card dues.
How can a personal loan assist in getting rid of the card debt trap?
Low rate of interest: Finance charges on credit cards are considerably higher as compared to personal loans. While the rate of interest of personal loan can range between 8 % to 24 % p.a, finance charges on credit cards begin from 22 % p.a and can go up to 49 % p.a. Savings that one makes on reduced interest cost can be utilized for making faster repayments of accumulated debt.
Simpler to manage the repayments: Though credit cards even permit conversion of the outstanding balances into affordable EMIs, those credit card users with outstanding credit cards outstanding on multiple credit cards would mean multiple EMI schedules as well as due dates. In place of this, opting for a personal loan for repaying multiple credit card dues will assist in consolidating your debts for a single rate of interest, EMI and repayment tenure. Based on your repayment capacity to meet the loan, you can select personal loan tenure that ranges anywhere between 1 and 5 years, with few lenders willing to offer higher repayment tenure of up to 7 years.
Basic things to note when choosing a personal loan for repaying your outstanding credit card debts:
Credit score: Owing to personal loan’s unsecured nature, lenders offer higher interest rates or turn down personal loan applications of the ones with a lower score of below 750. As credit card users with accumulated debt might already hold low credit scores owing to missed repayments, their chances of getting personal loans at lower interest rates or of personal loan approval may be below.
Also, opting for multiple direct inquiries may do more damage than good because lenders report these inquiries to the credit bureaus, who are responsible for pulling one’s credit score down by a huge margin, which in turn brings down your personal loan eligibility.
What to do: To avail better interest rates on personal loans, ensure to widen your search horizon for a personal loan by approaching various lenders. This can be done by visiting online financial markets that allows you to compare among as many lenders as possible. Strike a comparison among lenders on such platforms to opt for the lender offering the lowest rate and other charges on a personal loan. Also, opting for such online platforms to compare among lenders will not affect your credit score in any way, as inquiries conducted by such platforms are looked upon as soft inquiries.
Loan repayment tenure: The loan repayment tenure of a personal loan plays a huge role in calculating your EMI and thorough interest cost. Longer repayment tenure results in smaller EMIs and higher interest outgo, while the reverse is true for loans having shorter repayment tenures.
What to do: Choose the loan repayment tenure basis your repayment capacity and the expected future cash flows. An aggressive repayment schedule for a personal loan should be opted for only if you can meet the EMIs on time. Otherwise, failing to meet aggressive repayment schedules can enhance your cost of borrowing through late payment fees etc. and may even push you further into a bigger debt trap.
Prepayment charges: Personal loan’s prepayment entirely or in part assist in lowering your interest cost. However, lenders that offer personal loans on fixed rates may penalize foreclosure or prepayment of personal loans by charging up to 5 % of outstanding principal on personal loans.
What to do: Prefer availing personal loan on floating rate if you plan to prepay your loan in future. It is because personal loans on a floating rate do not incur any prepayment charges.
Rate of interest of the alternative credit options: As the savings on interest repayments is one of the major goals of opting for a personal loan for repaying your card dues, rate of interest charged on other alternative credit options such as top-up home loans, loan against property, loan against securities, gold loan etc. must not be avoided. As such alternative credit options are secured in nature, their rate of interest can be extremely lower than personal loans. Few like top-up home loans, loan against property options might even offer longer repayment tenures, which further helps lower your EMI burden.
What to do: Compare the rate of interest of the alternative credit options charged by numerous lenders via online financial markets to avoid any negative impact on credit score.