Home loans are basically a long term financial product and most individuals are bound to make the home loan at least once in a lifetime. A home loan lets you afford the house of your choice by paying a small amount regularly for a number of years. But a question which arises very often is – can I pay the EMI or the principal amount of the home loan through credit card? Now, let us find out whether and how one can utilise a credit card for the repayment of the home loan.
The short answer to this question is – indeed, you can, in principle, use your credit card for paying the EMI or the lump sum principal amount of your home loan. However, it is generally not advisable to do so on a regular basis. Credit card usage comes with higher interest rates for the purchase and has to be returned within a short time. On the other hand, home loans have slightly lower interest rates and a longer period to pay back the loan.
By using only the minimum due amount on credit card, interest charges are incurred and result to more debt. However, if one has to pay for a one-time or emergency home loan using the credit card, then opting for balance transfer to a 0 percent introductory APR card or making full payment before the due date can save a lot of money. Just do the maths well on interest costs before considering this option.
How to pay Home Loan EMI through credit card
All the banks offer various repayment modes to pay the monthly house loan EMI or other lump-sum payments such as –
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Auto Debit: You should also open an auto debit from your savings or salary account every month to pay the EMI amount automatically. This is perhaps the most common and most convenient of all the methods of disseminating information.
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Net Banking: Pay your home loan EMI or the principal amount outstanding through your bank’s net banking facility on a one time or through recurring payments.
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Mobile Banking App: Many Banks enable home loan repayment through their mobile app using options such as IMPS NEFT or RTGS transfer.
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Cheque or Demand Draft: Pay through a cheque or a demand draft in favor of your lender on a monthly basis. However, this requires a lot of manual work.
- Credit or Debit card: In the same manner as other banks, most lending institutions give their customers the option to pay for a home loan with a credit or debit card. It reduces your credit card balance as any other spending transactions do in the sense that it reduces the amount of money that is credited to your account. Some banks may charge a fee for this convenience.
Advantages of Using Credit Card
Is it wise to use short term funds like your credit card to pay for a long term loan? That being said, there are some advantages from a convenience and rewards standpoint that this route provides. These include -
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Rewards Points: Every credit card comes with attractive reward points on each purchase made through the card. Such points can be used when paying for various purchases or to offset various statement credits. These are available if you have an airmiles or cashback credit card and you use it to pay your home loan EMI.
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Credit Utilization: Paying a large amount towards your home loan improves your credit utilization ratio as it reduces the balance to limit ratio. Some authorities suggest that the ideal figure should be below 30. This is good for credit rating.
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Ease and Flexibility: Choosing to pay your loan through an EMI with a credit card allows for flexible interest free periods and better management of cash flows in addition to earning more rewards than any other modes of payment
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Complementary Services: Some of the facilities offered by credit card companies include personal accident insurance, waiver of EMI’s etc that can prove useful in situations where the loan to be repaid becomes a problem.
Potential Downsides
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Another disadvantage of using a credit card is that it has a very high interest rate up to 36-42 percent annually and is compounded monthly in case the entire balance is not paid within the grace period. These charges apply even when there is an unpaid balance in any amount and eliminates any chance of earning rewards.
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Payment Period – Minimum amount that must be paid against credit card bills is usually 5% of the total amount. So in essence you are only making a fraction of what you owe your home loan every month and in turn, racking up a total debt.
- The advantages of credit cards are: • Cash advance limits – most credit card companies have set a limit to the total cash that can be availed as a percentage of credit limit ranging from 30 to 50 percent. Your bank may deny attempted loan repayment over and above this limit.
Alternate Options to Consider
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Loan Takeover at Lower Rates: If you are receiving better rates and terms with any new lender, you can think about transferring the home loan balance from your current lender.
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Top Up Existing Loan: Instead of applying for a new credit line, find out if the lender will offer a top up loan at better interest rates to clear credit card balances
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Lower Rate Balance Transfer: The interest cost should be minimized before further repayments are made by moving any unresolved credit card balances to low interest balance transfer offer.
- Foreclosure Insurance Cover: Choose insurance plans which offer protection against loan termination due to certain circumstances for your credit risks.
In conclusion, employing credit cards to service a long term home loan may sound convenient from a convenience perspective at initial stage but comes with various risks include; debt traps, rolling high interest charges and credit score negative effects in the long run. However, it is advisable to undertake a proper due diligence across these parameters with appropriate financial management before taking this step.
