Loan Against Credit Card: How It Works & Things to Consider 

Introduction to Loan Against Credit Card 

A loan against a credit card is a quick and convenient way to access funds during financial emergencies. Unlike traditional personal loans, which require paperwork and a waiting period, a loan against a credit card offers instant approval and disbursement. If you have a high credit limit and a good repayment history, you can leverage your available credit to secure a loan without additional collateral.

This type of loan is particularly useful for individuals who need urgent cash for medical expenses, home repairs, or even travel. However, it’s essential to understand how it works, the interest rates involved, and the potential risks before applying.

How a Loan Against Credit Card Works 

A loan against a credit card essentially allows you to borrow money based on your available credit limit. Here's how it works:

• Pre-approved Loan – Banks and credit card issuers offer loans against your credit card limit based on your creditworthiness and repayment history.
• No Additional Collateral Required – Since the loan is secured against your credit card, no extra security or documentation is needed.
• Quick Disbursement – Once approved, the loan amount is directly credited to your bank account within hours or even minutes.
• Flexible Repayment Tenure – You can choose a repayment period ranging from a few months to a couple of years, depending on the bank’s terms.

Example: If your credit card limit is ₹2 lakh and your bank allows a loan of up to 80% of your limit, you can borrow ₹1.6 lakh as a loan.

Eligibility Criteria for Loan Against Credit Card 

Not everyone with a credit card is eligible for a loan. Here are the typical requirements:

• Good Credit History – A high credit score and a clean repayment track record are essential.
• Minimum Credit Limit – Most banks require a minimum credit limit (e.g., ₹50,000) to qualify for a loan.
• Active Credit Card – The card should have been in use for a specific period (usually 6–12 months).
• Income and Employment Stability – Banks may consider your monthly income and job stability.

Advantages of Taking a Loan Against Your Credit Card 

• Instant Access to Funds – The loan is processed and disbursed quickly, making it ideal for emergencies.
• No Need for Documentation – Since you’re an existing credit card holder, no additional paperwork is required and this saves a lot of hassle and time.
• Flexible Repayment Options – Choose a repayment tenure that suits your cash flow.
• Competitive Interest Rates – Lower than cash withdrawal charges but higher than personal loans.
• No Impact on Credit Card Spending Limit – Some banks may offer the loan over and above your existing credit limit.

Disadvantages and Risks of Credit Card Loans 

• High Interest Rates – While lower than cash withdrawals, credit card loans have higher interest rates compared to personal loans.
• Impact on Credit Score – Failure to repay the loan on time can damage your credit score.
• Processing Fees and Charges – Banks may charge processing fees (typically 2%–3% of the loan amount).
• Reduced Credit Limit – If the loan is adjusted against your credit limit, it may reduce your spending capacity.
• Penalty for Late Payments – Delayed payments can attract heavy penalties and increase your outstanding debt.

Key Considerations Before Applying for a Credit Card Loan 

• Assess Your Repayment Capacity – Ensure you can afford the monthly instalments without affecting your budget.
• Compare Interest Rates and Fees – Different banks offer different loan against credit card interest rates and terms — shop around before deciding.
• Evaluate the Need for the Loan – Avoid using a loan for discretionary spending like shopping or vacations.
• Amount requirement: If the loan you require exceeds the amount offered as a loan against credit card limit, it may be more practical to explore a personal loan, which often provides higher borrowing capacity and better repayment flexibility.
• Understand the Repayment Terms – Check for hidden fees, prepayment charges, and penalties.
• Check the Impact on Your Credit Limit – If your available credit limit drops, it could affect your credit utilization ratio and credit score.
• High Credit Score Advantage – A high credit score can help you secure a loan at a lower interest rate, making personal loans potentially cheaper.
• Usage Against Credit Limit – Taking a loan against your credit card reduces your available credit, which can increase your credit utilization ratio and negatively affect your credit score if it exceeds 30%.

How Interest Rates and Fees Are Calculated 

Interest rates on loans against credit cards are generally higher than personal loans but lower than cash advances.

• Interest Rate Range – Typically between 12% and 24% p.a. depending on the bank and your credit profile.
• Processing Fee – Usually between 2% and 3% of the loan amount.
• Late Payment Charges – Can be as high as 3%–5% of the outstanding amount.

Example: If you take a ₹1 lakh loan at 18% p.a. for 12 months, the total repayment will be approximately ₹1,18,000, including interest and processing fees.

Alternatives to Loan Against Credit Card

Given the rising inflation and fluctuating interest rates, it’s wise to carefully assess your financing options to avoid excessive debt and ensure manageable repayments. If you’re unsure about taking a loan against your credit card, consider these alternatives:

• Personal Loan – Personal loans may offer lower interest rates and longer repayment periods.
• Overdraft Facility – If you have a good relationship with your bank, you can get an overdraft linked to your savings account.
• Top-Up Loans – If you have an existing loan, banks may offer a top-up loan at a competitive rate.
• Peer-to-Peer Lending – Platforms like Faircent and LenDenClub offer quick loans at lower rates.
• Emergency Fund – Consider dipping into your emergency fund if the expense is urgent but manageable.

Thus, a loan against a credit card can be a lifesaver in a financial crunch, but it’s not without risks. Weigh the pros and cons carefully, compare interest rates, and assess your repayment capacity before applying. A high credit score can work in your favour by securing lower interest rates on a personal loan. Borrowing against your credit card limit can impact your future spending power and credit score. Used responsibly, it can be a smart financial tool — but misuse could lead to a debt trap. Always read the fine print and understand the terms before signing up.