Cash from existing credit line - no, it's not cash advance or HELOC

Coronavirus has stretched many Americans’ budget and the need to borrow for everyday expenses like rent or electric bill. Personal installment loans, offered by FinTechs, have been providing cash to people, digitally, instantly, for a decade now.

Many Americans have billions of dollars of available credit on their credit card. Technically credit card issuers provide access to that credit line to withdraw cash. Cardholders often need to have a cash pin, go to an ATM physically and pay almost usury level interest rate. Cash advance is treated with disdain by risk managers and rightfully so, because only the most desperate would jump through so many hoops to get cash from a credit card.

Homeowners with equity have had access to loans from Home Equity Line of Credit (HELOC) for decades, but no such luck for others.

Coming to think of it, why aren’t similar cash loans available for credit card customers? How would it work? Building on the pillars of digital, convenience and transparency, such a product will have 4 key features.

First an issuer would determine how much of the card holder’s credit line can be available for cash loan. This could be same as how cash line works today.

Second, card holder will get to choose how much he or she wants to borrow and receive as cash. So far, nothing is different from how cash advance on credit card works, right? Next two features are the key to providing budget friendly, transparent cash loan options.

Third, card holder gets to choose the term of the loan, number of months over which he or she will pay off the installment loan, interest rate or fee. Issuer still controls the duration options, interest rate, or fees offered. But this gives the card holder some choice and a feeling of control in deciding how much monthly payment he or she can afford.

This is difference no. 1. No more cash advance at high interest rate hidden inside the minimum payment. Average card holder often doesn’t have any idea of the borrowing cost while using cash advance feature in credit card. An installment loan offer for cash from open credit line will provide transparency and a sense of control to card holders.

Fourth, once a card holder agrees to the amount and terms of loans, money is sent digitally to debit card or bank account. Personally, I would like to see card holders getting options like receiving money via PayPal, Venmo or Zelle.

Difference no. 2 is how the customer receives the money. FinTech personal loan providers pioneered digital disbursement to customers in near real term. No reason why credit card issuers cannot provide the same feature.

Voila! Credit card customers can get cash loan from their unused credit line with transparency and convenience. No need to apply for a new loan at another bank or FinTech. No confusion with complicated average daily balance calculation.

With this new version of digital cash loan, issuers can get more out of the credit line they have already extended. Banks and credit unions can compete with FinTech personal loan providers who promote all-digital, easy apply, transparent loan options and fast cash disbursement.

Credit card issuers can provide the same digital service, installment loan offer and fast cash disbursement without any new loan application. You can’t beat that! After all, credit card is nothing more than a line of credit with a card attached to it. Line of credit options have been known in point-of-sale financing and home equity for a long time.

It is time that all credit card users benefit from the credit they already have. Personal loans and credit cards can blend beautifully and it’s a good thing for everyone.