Personal loan vs credit card cash advance

Sun Jan 20, 2013 7:07pm IST

Rupee notes of different denominations are seen in this picture illustration taken in Mumbai April 30, 2012. REUTERS/Vivek Prakash/Files

Rupee notes of different denominations are seen in this picture illustration taken in Mumbai April 30, 2012.

Credit: Reuters/Vivek Prakash/Files

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When in need of urgent cash many people take cash advance from their credit cards. It is interesting to note that banks can charge up to 45% interest on an annual basis on the unpaid amount till the time the dues are cleared. This is clearly a huge interest to pay in the current scenario. Additionally, when there are outstanding dues, any further expenditure made is also charged at the hiked up penalty rates of interest. In many cases people take personal loans to settle the outstanding dues of their credit cards. There are differing views on this kind of financial management as the losses in terms of interest paid are high in both cases.

In favor of the credit card cash advance

There are a few definite advantage of taking cash advance through the credit card which is the reason why so many people use it in the first place. Some these benefits are:

- There is absolutely no delay in sanction as one can just walk up to an ATM and withdraw the money.

- One has the option of drawing exactly the amount that is needed and not more.

- There is no requirement to approach any bank and the money is accessible from remote locations in case of emergencies.

- Repayment schedule of the cash advance is as per choice of the burrower and not as per the banks fixed schedule.

- There are no prepayment penalty charges for credit card cash advance.

- In case one is able to clear off the dues within the interest free period then this option works out to be the cheapest.

In favor of the personal loan

Since one avails such facility during period of urgent cash requirements the chances that one will be able to pay off immediately afterwards are less. In case of a credit card if one cannot pay back in time the costs are prohibitive. However in the case of personal loans:

- The repayment period is suitably long to give the burrower some breathing space while repaying.

- The interest rate of a personal loan though higher than other loans is still less than half of the penal interest that is charged on outstanding amount of credit card dues.

- The amount that one can withdraw through a credit card cash advance is limited while in case of personal loans the amount is much more which can make a significant difference to needs of the burrower.

Illustration:

If the burrower had a balance of Rs. 50,000 on his credit card dues for which he will be paying interest @ 36% p.a. Let us assume that he can pay only Rs. 5,000 per month. At this rate, he will require 13 months to completely clear this debt and would end up ended up paying an interest of Rs. 10,368. But if he decided to take a personal loan of Rs. 50,000 instead to pay off his credit card bill with interest @ 18% for 1 year, his EMI would come to Rs. 4,584. In this manner he will manage to clear his debt within 12 months at a total cost of Rs. 5,008 only, thereby saving more than 50%.

While both the means of raising instant funds have their own pros and cons it is for the customer to decide as per his own financial status.

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