Here's What Happens When You Take Out a Credit Card Loan

Consider all your options if you need to borrow in a hurry.

Getting an unexpected bill is one of those parts of adult money management that no one enjoys, but happens to all of us. Perhaps your furnace died over a holiday weekend, or your car needs a pricey repair. Either way, now you need money in a hurry, and you're looking for the easiest way to borrow. You definitely don't want to fall back on a costly payday loan. You might consider a personal loan, but what if your trusty credit card could help you out?

There has long been a way to extract cash from your credit card in a hurry, and it's called a cash advance. Cash advances let you borrow cash from your credit card's cash advance limit, which will usually be lower than your credit limit, and can be found in your credit card terms and conditions. You withdraw the cash at an ATM, using a PIN provided by your card issuer. This method of borrowing should be considered an option of last resort, though, as you'll be charged a cash advance fee as well as interest, which will begin accruing immediately, rather than allowing you a grace period like a normal credit card purchase.

But a few big-name credit card issuers are now offering credit card loans. Here's how they work.

How credit card loans work

A couple of credit card companies now offer loans based on your existing credit limit with them. There's no application process, and borrowers receive the funds via direct deposit or a mailed check, so it will likely be a few days' wait at the most to get cash in hand. The credit card company tells the customer how much they can borrow and provides an interest rate based on spending habits and creditworthiness. The loan is then easy to manage by way of that existing account with the lender, and customers can select a payment timeline and see how many payments are left. Sounds pretty good, right? Unfortunately, credit card loans come with a few drawbacks to be aware of.

A few potential pitfalls of credit card loans

Before you rush to see if a credit card loan might help you out of a jam, there's a few things to know. First and foremost, a credit card loan will increase your credit utilization ratio. This is the amount of your available credit that you're using. To avoid credit score damage, it's best to keep this number to less than 30%. If you have a $10,000 limit on your credit card and you're already carrying a balance of $2,000, and then take out an additional $2,000 in the form of a loan, your credit utilization ratio for that card is now 40%.

Another potential problem with credit card loans is the interest rate. A credit card loan likely won't be as costly as a cash advance, but if you have a solid credit score, you might qualify for a better interest rate on a personal loan -- personal loans for good credit offer rates as low as 5.99%, while you might end up with an APR of 9.99% or higher on a credit card loan.

Alternatives to credit card loans

You have options when it comes to borrowing money, and perhaps one of these will be a better solution for you than a credit card loan:

• Salary advance from your bank: Some banks offer a small-dollar loan program where you can borrow a little money, in the form of an advance on a future paycheck, in a hurry for a surprise bill.
• Personal loan: As discussed above, if you have good credit, you might qualify for a decent interest rate, and these won't impact your credit utilization ratio.
• Buy now, pay later: BNPL plans are becoming more and more common, so check to see if this is an option for your surprise bill -- it might be if you need to replace a vital appliance or make another large purchase in a hurry.
• 0% APR credit cards: It could take a while to get one of these, so it might not be a fit if you need to pay for something ASAP. However, if you qualify, you'd be entitled to a period of earning no interest on your bill or purchase for a predetermined period of time. So if your purchase can wait until you receive the card, this is a great option for cheap borrowing.

Emergency funds are ideal for just such a situation, but the reality is that many Americans don't have one stashed away in a savings account for a rainy day. A 2022 Prudential Pulse survey found that 50% of those asked couldn't cover a $500 emergency out of their savings. It's important to be able to borrow money in a hurry when you need to, so make sure you consider all your options before signing on for a credit card loan.