In today’s era, the trend of credit cards has increased rapidly, especially among the youth. The young generation wants to fulfill all their small and big needs with a credit card. Whether it is to buy a new mobile or to go for a trip, a credit card is useful everywhere. But, do you know how much damage a loan taken on a credit card can cause to your financial condition? Finance experts believe that taking a loan from a credit card is easy, but paying the huge interest can be very difficult. It can trap you in a debt trap. Let us understand in detail in this article why a loan taken on a credit card is so expensive and how to avoid it.
Avoid these mistake while using Credit card
The loan available on a credit card often looks attractive, but the high interest rates hidden behind it can drain your savings.
The difference between a credit card loan and normal shopping
You usually get an interest-free period of up to 45 days on purchases made with a normal credit card. If you pay the bill within this period, you do not have to pay any additional charges. However, interest starts being charged on loans taken from credit cards from day one. Normal purchases have the option of a minimum payment, while loans have a fixed EMI, with no interest-free period. This is why it is more expensive.
Why is there such a high interest rate?
The interest rates on credit card loans are usually 18-24% per annum (0.99-1.5% flat monthly rate). Apart from this, there is also a 1-2% processing fee. If you repay the loan before the time, a pre-payment penalty of up to 3-5% may also be charged.
Let us understand this with an example
If you take a loan of ₹1 lakh at a monthly rate of 1.25%, then you have to pay around ₹10,000 in interest in a year. On the other hand, if you take a personal loan at a declining rate of 13%, then you will have to pay only ₹6,800 interest annually. Thus, the interest charged on a credit card loan can go up to 40-50%, which is heavy on your pocket.
Always remember these 5 things
Using a credit card correctly is an art. Keep these things in mind before taking a loan:
Take a credit card loan only in case of an emergency.
If you have to take a loan, look for low-interest personal loan options.
Always compare the interest rates of different banks.
Before taking a loan, calculate your EMI and total interest.
Pay any kind of loan on time to avoid penalties and interest.