Is a credit card loan right for you? Consider the risks and alternatives before you sign up
These convenient loans can seem like an easy fix when you're short on cash. But are they the best solution?
It can be so tempting: you need a little extra cash and there seems to be an easy way to get it. Credit card companies want to turn your unused credit line into cash that you can borrow for things like a vacation or unexpected expenses. But accepting this loan offer may not be the best choice for your wallet or your credit score.
Credit card loans are fast, convenient and cheaper than cash advances. But personal finance experts say the loans are still costly and can lower your credit scores, making it more difficult to obtain credit with low interest rates in the future.
Before you accept this seemingly simple way to get cash, consider the risks and compare your alternatives.
How a credit card loan works
Some bank customers don’t have to request a loan – or even apply. The companies promote their “flexible financing offering” or new “loan feature” via email, direct mail or on account log-in pages.
“It’s very tempting because it’s so fast and easy, with no application,” says David Rae, a certified financial planner based in Los Angeles. “If you’re already in debt, it can cause that debt to snowball and become a big problem.”
The amount you can borrow depends on how much credit line you have available. Once you choose a loan amount and repayment term, the issuer transfers the cash to your bank account within a couple of days, or will alternatively mail a cheque.
The loans have payback terms of one to five years, and monthly repayments are added to your card’s minimum payment due.
