Personal loans from banks in India come in various flavours suiting to almost every imaginable need. Ease of availability, minimal documentation and even doorstep service has become the hallmark of personal loans from banks and financial institutions in India. But are they cheap? Certainly not! Personal loan rates are not equal for everyone; depending on an individual's profile, banks can charge anywhere from 12% to even 30% or more as interest rates on their personal loans. Coupled with the various fees charged on such loans, personal loans are quite a costly solution to personal finance problems.
Mistakenly or otherwise, many people are willing to take cash advances from their credit cards and use them for any personal finance emergency. This practice may sound convenient since all a person has to do is to swipe his credit card and get ready cash, but it has its own drawbacks, which can cause a great harm to the financial health of any individual.
Why do people take cash advance from credit card instead of a personal loan? No enquiries, no documentation, no running to the banks and no waiting for the cash could be the answer. Yes, personal loan requires a procedure, which could take anywhere between 24-48 hours for approval, besides this the banks do look for income requirements, employment eligibility, eligibility in terms of age and residence, a suitable guarantee (if applicable) before granting any personal loan, but when it comes to getting cash for any emergency, personal loans are far better than cash advances from credit cards. The reasons listed below will certainly open your eyes to the harsh reality that sets in once you have taken a cash advance with your credit card, instead of a personal loan.
Personal loan interest rates vary from 12% to 30% depending on your credit worthiness as decided by the banks, but the cash advance from credit cards will be charged an interest rate upward of 35% in every case, and in some case it can go as high as 50%. This makes it a very high interest rate loan.
Fees and other costs:
Banks charge processing fees, administrative charges etc. while giving a personal loan. If you look very creditworthy to the bank and are willing to negotiate and compare offers from different banks, these fees can be waived. However, in case of a cash advance there is a non-refundable and compulsory cash advance fees with every such transaction. This fees can vary from 3%-5% of the total cash withdrawn, and when this fees has no upper limits things can become very costly. This cash advance fees has a certain minimum value as well, so even if you withdraw a single Rupee, this minimum cash advance fees will apply. The processing fees and other charges associated with a personal loan will seem meager when compared with this cash advance fees.
Interest rate through the repayment period
The interest rates charged on personal loan remains the same throughout the repayment period if you have opted for a fixed rate or it can vary little bit if floating rate was chosen. On the other hand credit card companies apply any repayments to balances with low interest first and so on. So, if you regularly use your credit card and repay fixed amounts, credit card companies will use it to offset your regular balances first and chances are great that your cash advance will be repaid only after your repayments has covered other outstanding balances. This will cause your cash advance to earn a high interest rates for the credit card company.
In addition to it if for any reason you miss your repayments with the credit cards, penalty interest rates and late payment fees will increase your burden.
Cash advances from credit card, can be quite disastrous and are not a replacement for personal loans. However, if some circumstances compel you to take cash advance, it will be better that you repay your entire outstanding amount with the very next monthly bill.