How a Personal Loan can help you get out of a financial trap caused by credit card debt
Credit cards are no longer just for making payments and obtaining quick credit; they can be used for a variety of purposes. They also come with enticing offers and advantages on card transactions, which, if taken advantage of, can drastically lower your transaction expenses if done correctly. But it is precisely these advantages and the availability of rapid credit that tempt individuals who lack the financial discipline to spend beyond their means. As a result, they are unable to make their bill payments on time or at all. If the problem is not addressed immediately, the outstanding balance will grow rapidly as a result of the high finance charge and late payment fee. One of the most effective methods of getting out of a debt trap is to take a 5 lakh personal loan.
The following are the advantages of taking out a 1 lakh loan to break out of the credit card debt trap:
Interest rates get lowered
The rate of interest levied on delinquent credit card debts is higher than the rate of interest charged on the majority of loan choices. It is also referred to as finance charges, and they can be as high as 49.36 percent per annum. Additionally, if the minimum amount due is not paid, you may be charged a late payment fee of up to Rs 1,000 in addition to the late payment fee. Personal loans like 5 lakh personal loan, on the other hand, have interest rates that range anywhere from 10.50 percent and 24 percent per annum, depending on your credit score, work profile, loan size, and a variety of other criteria.
Repayments are simple to manage.
While credit cards allow you to convert your outstanding dues into EMIs, people who have outstanding balances on several credit cards will have various EMIs and due dates to contend with as a result of the multiple credit cards. Selecting a 1 lakh personal loan to repay your many credit card bills would allow you to consolidate your multiple debts into a single personal loan with a single interest rate, length, and EMI date, rather than having to pay them all separately.
The interest-free period is reinstated.
An interest-free period is defined as the length of time that elapses between the date of a credit card transaction and the date on which the bill is due for that billing cycle. This period is normally between 18 and 55 days in length, depending on the circumstances. If you pay your complete outstanding account before the due date, you will not be charged any interest on the credit card transactions you make. It is possible that you will lose access to this facility on future credit card purchases if you do not comply and that you will be charged finance costs from the date of the transaction until you pay off your outstanding debts. You can pay off your current debts in full by taking out a 5 lakh loan, which will restore your interest-free period and allow you to continue making regular credit card purchases without incurring financing charges. – You can pay off your existing debts in full by taking out a 1 lakh personal loan. Things to consider before taking out a 5 lakh personal loan to pay off credit card debt include the following:
Avoid submitting direct loan applications to many lenders at the same time:
When you apply for a loan, lenders will request a copy of your credit report from one or more credit agencies in order to determine your creditworthiness. Such lender-initiated requests are referred to as hard inquiries, and each one of them causes the credit bureaus to lower your credit score by a few points, as explained above. As a result, making many 1 lakh personal loan inquiries in a short period of time will result in a faster loss of your credit score and, as a result, a reduction in your 5 lakh personal loan eligibility. Instead, use online financial markets to compare loan offers because the credit inquiries initiated by these marketplaces are deemed “soft inquiries” and will not have an influence on your credit score, as opposed to traditional banks.
Determine the length of your loan based on your ability to pay it back as EMIs
A shorter loan term results in a greater monthly instalment payment, whereas a longer loan tenure results in a smaller monthly instalment payment but a higher interest expense. If you can comfortably repay your monthly instalments by the due date without losing your commitment to important financial goals, you might consider a shorter loan term instead of a longer one. If this is the case, choose a longer-term.
When compared to other lending possibilities, for example:
In most cases, secured loan choices such as a loan against property, a gold loan, and a loan against stocks are less expensive than unsecured lending options such as a 1 lakh personal loan. Some of them also have a lengthier repayment period than others. Aside from these secured loan choices, credit cardholders can also take advantage of the credit card balance transfer option to transfer their outstanding balances to another card and take advantage of the promotional interest rate period. During this time, the sum transferred is subject to a lower or zero interest rate for a limited period of time, normally up to six months, depending on the circumstances. Similarly, cardholders have the option of converting their outstanding balances into monthly payments at a rate that is far lower than the original finance costs.
Therefore, compare interest rates imposed by different lenders on personal loans as well as other alternative loan types by visiting internet financial marketplaces. Also, before making a final decision, make sure to check with your current and other credit card issuers about EMI conversion and credit balance transfer, as well as other options.
Returns that your current fixed-income assets are yielding.
The returns on fixed income instruments, such as bank FDs and debt funds, are often less favourable than the returns on personal loans. As a result, if your fixed-income investments are not tied to critical short-term financial objectives, you should consider selling them to pay off your outstanding credit card debt. However, refrain from using your contingency savings because any unforeseen financial difficulties may require you to take out more expensive loan options to cover your expenses.