Is it Beneficial to Pay off your Credit Card Debt with Personal Loan
Credit cards frequently lead us to assume that it is our money to spend, and as a result, you may end up spending more than you can afford to return. The outstanding debt continues to rise at an alarming rate due to the exorbitant interest rates charged by credit card issuers (can be as high as 45%). This is the time to start looking at solutions to get out of debt. Taking out a personal loan is one of the most popular strategies to pay off credit card debt. However, it is crucial to understand that in order to be able to apply for a personal loan you need to fulfill some eligibility requirement of your lender like having a high Credit score.
Personal Loan Application and Benefits
In today’s environment, the process of applying for and receiving a personal loan is rapid and can be completed with the touch of a mobile screen. Simply check your eligibility on the money lending app of your choosing and apply for a loan ranging from INR10,000 to INR5,00,000, which will be deposited into your bank account within two business hours after loan acceptance. It is quick and straightforward, and it might assist you in repaying your credit card debts. Now that you know the process of applying for a personal loan, there are numerous benefits that come along with a personal loan. Some of those benefits are as follows:
Low interest rates
Credit card firms can charge up to 45 percent in interest, whereas banks and other money lending apps in the market offer personal loans with interest rates ranging from 11.5% to 24%.
Better Debt Repayment Management
By converting your credit card debt to a personal loan, you demonstrate your desire to conserve money and pay off your debts as quickly as feasible. This contributes to your reputation as a creditworthy individual. You also save money on monthly financing costs, which credit cards charge in addition to interest if you keep using them. If you create EMIs for your loan, you can also pay it off in a systematic manner. If you have balances on two or more credit cards, you’ll have to keep track of multiple outstanding payment amounts and due dates throughout the month. Taking up a single personal loan to pay off many credit card bills consolidates your debt and reduces your hassle. It is beneficial for the people who are casual towards their repayment timelines.
Flexible EMIs and Loan Terms
Personal loans allow you to choose the length of your loan based on your ability to repay it. Personal loans, unlike credit cards, are repaid over a period of one to five years, as opposed to credit cards, which require payment of the full amount in one go to avoid interest and penalties. This allows you to effectively plan your repayments.
Key Considerations While Applying for a Personal Loan
There are a few points that you need to consider while applying for a personal loan. Some of the key points are as follows:
Credit Score
Because you are merely relocating your debt from one pocket to another, transferring credit card debt to a personal loan has no effect on your credit score. A systematic approach to repaying your debt with a personal loan, on the other hand, will assist you in progressively removing the unsecured loan liability from your credit history. Furthermore, according to the repayment schedule for an unsecured personal loan improves your credit score. However, if you do not pay your credit card bills on time, your credit score may suffer. Moreover, if you have a low credit score, then there are a lot of methods on how to improve your CIBIL score that you can follow in order to increase your credit score.
Prepayment Charges
Many banks will not allow you to pay off your personal loan until it has been in place for a particular amount of time. Prepayment penalties are frequent with most lenders and typically vary between 2% and 5% of the outstanding principal. Check with the bank to which you are asking for a personal loan. Choose a personal loan from a lender that does not charge a prepayment penalty if you anticipate future cash inflows. This allows you to pay off your outstanding balance without incurring any additional charges as a result of any unexpected gains or bonuses.
Tenure of the Loan
The length of your loan will have a large impact on the size of your EMI. A longer term results in a cheaper EMI, but at the expense of a higher interest rate. The converse is true for short-term loans. Choose a short-term loan based on your repayment capacity and predicted future cash flows.
Though the credit card vs personal loan debate is never ending, with the features listed above, it makes sense to replace credit card debt with a personal loan to cover the entire amount. However, the loan’s duration should be carefully considered, and it should be arranged in such a way that the monthly instalments may be easily paid. Any missed payments on a personal loan will have a negative impact on your credit score.