New Delhi: In response to a new directive, insurance companies are welcoming a move by the insurance regulator to protect the interests of policyholders.
The directive suggests that customers should not repay loans by borrowing on credit cards,
as the high interest rates on outstanding credit card balances are not in the customers’ best interests.
Experts warn that repaying loans through credit cards can lead to financial discipline issues, which could result in default or partial payment and lead to higher interest rates for customers.
Experts advise against repaying loans through credit cards
Sunil Sharma, president, chief actuary and chief risk officer of Kotak Mahindra Life Insurance, believes that the new directive is a good move that safeguards the interests of policyholders.
Sharma added that the interest rates on loan against policy are much lower than those of unsecured personal loans. This makes it financially unwise for customers to use credit cards to repay policy loans.
Avoiding the debt trap: using accumulated funds to repay loans
Kapil Mehta, co-founder of SecureNow, agrees with the regulator’s stance that credit card insurance loan borrowers can fall into a debt trap.
He notes that insurance loans usually have interest rates ranging from eight to 15 percent, while credit card interest rates can exceed 20 percent.
Kamlesh Rao, managing director and chief executive officer of Aditya Birla Sun Life Insurance, believes that the new mandate ensures that policyholders’ best interests are protected and supports responsible financial planning.
Rao advises policyholders to repay their loans using accumulated funds rather than credit cards to avoid the debt trap.
