Think Before You Take

If you have a credit card, you might have received SMSs from banks to avail personal loan against your unused  credit limit. It sounds good, specially in this pandemic, as many of us having uncertinity and facing financial crisis. I personally thanked banks and FIs for this initiative. At least this support would be enough to give mental boost.

 Those who are planning to take loan for 12 months or less, it is fine. Banks are charging flat interest rate of 12.5%-13.5% with 1%-2% service fee. For one year, interest amount will be split along with loan amount into twelve months. Let me give you an example to make it easy, say you take a loan of Tk. 100,000 for 12 months with a flat interest rate 12.5%, your monthly EMI/installment will be Tk. 9,375 (loan amount 100,000 + Interest Tk. 12,500)/12 (Number of months). As many of us like me took loan for one year, we generally did not care about the teams and conditions. We agree with terms as the EMI calculation is understandable to us.

 But if you are planning to take loan for longer period, say for 24 to 60 months, you are going to pay 25% - 67.5% interest for the same amount of loan. Again if you add 1-2% service charge with it, IRR may cross 70%. Seems crazy? But it is true. You cannot blame Banks or FIs for this high rate. Because they mentioned the chart of charges in all documents, webpage and leaflets. But, we hardly read or understand those. Loan against credit card is not like other general loans which follows Reducing Balance Method (this method calculates interest payments based on the outstanding principal balance) or basic PMT formula. But credit card charges flat rate for each year. So, interest rate of 12.5%, which is basically for one year, will be 2 times higher in two years and 5 times higher in five years, no matter how much you have paid so far. Let’s make it easy with last example, for 2 years EMI will be Tk. 5,208 (100,000+25000)/24 and for 5 years EMI will be Tk. 2,708 (100,000+62,500)/60. You might be happy to pay small installments to enjoy long payback period. But, when the interest is more than 60%,that could be a reason of concern.

Some of you might think this is robbery or act like village interest monger “Mohajon”. But you are wrong, Banks are “Legally” right. It is we, who do not read or understand the “banking terms”. It took time and effort of mine to unearth the credit card EMI calculation system. I shared the fact for your awareness. So, think before you take.