Taking personal loan to finsh your outstanding Credit card bills is worth?

Credit card users, who have overspent on their card, have a new option – conversion of the outstanding into a personal loan. Banks are willing to do so because they are worried that any non-payment of dues would increase their non-performing assets, which in turn, could hurt their balance sheets quite badly.

Such an offer also implies that many customers, who were finding it difficult to pay off the amount, can use this method to ensure that they do not become defaulters.

One of the biggest benefits of this kind of conversion is that the rate of interest will be much less on personal loans. As far as credit cards go, there is huge interest burden (between 36-44 per cent per annum) that is climbing with each passing month. A personal loan comes much cheaper at 16-22 per cent, lesser by almost 40-50 per cent.

However, things are not that simple. There is an additional risk that even when the interest burden goes down, it could lead to a situation where it becomes very difficult for the consumer to manage his finances.

Regular payment: In case you opt for a personal loan, regular monthly payments have to be made and for a specific time period. While this is good because it will mean a disciplined payout, for some, the situation could worsen.

This is because while the credit card company allows a minimum payment of 5 per cent per month, in case of a personal loan the outgo could be higher, especially if one opts for a smaller tenure.

For instance, if a person has an outstanding of Rs 200,000, the monthly outgo at the rate of 5 per cent will be around Rs 10,000. In case the amount is converted to a two-year personal loan at say 18 per cent, the outgo will be around Rs 18,000. Clearly the sudden rise in the repayment amount by 40-50 per cent could lead to a situation where the budget goes completely haywire.

Also, in such situations, investments are the first one to take a hit because other expenses are more difficult to control. And if this happens, the safety net that you are creating for the future could get reduced. When faced with such a situation, it is important to select the right tenure so that the burden does not increase dramatically.

Prepayment problem: Also, many times when you go for a personal loan, the bank puts a clause where prepayment is allowed only after a certain number of months or only so many times in a year. In some cases, there is even a hefty prepayment penalty if you were to exercise this option. This is because the bank is losing out on the interest income.

Individuals facing a temporary glitch as far as their finances go, should take a step back and give the situation some serious thought. If they get a sudden cash flow, in terms of bonus or any other source, they could use that to wipe off the outstanding credit card bills.

Yes, it will mean temporary pain because of high interest rates, but it would be a better option to clear the entire loan instead of coughing out equated monthly instalments for a long time.

Continued spending: The biggest risk is that the person could actually sink further into a debt trap, if he continues to hold and spend on the card. Now that the outstanding on the credit card is converted to a loan, there is no outstanding. This could easily lure a spendthrift to use it again.

In this situation, the balance on the card will rise again leading to financial crisis as the consumer would now they have a personal loan and more credit card bills that need to be paid.

Source: Rediff

5 Responses to Taking personal loan to finsh your outstanding Credit card bills is worth?

  1. Shree says:

    Atlast the banks have come up with some thing positive to the credit card users. Else they used to bankrupt the customers by charging heavy interest rates, leading to the disaster financial condition of the card users…

  2. That’s true Shree, but it also becomes responsibility of individual to look before they jump to take credit cards.

  3. Shree says:

    Well said.

  4. Taking a loan out to repay a credit card is definitely digging yourself deeper into debt. Those is debt need to stop applying for credit and work as hard as possible to repay what is owing.

  5. Great post!! I just have to copy it 🙂

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