Short-term cash advances come with many downsides that could trap you in a cycle of debt, so make you shop prepared!
Cash advances can seem like a good way to paper over a hole in your budget: They’re fast, they’re easy, and you can pay them back with your next paycheck. But there’s a lot more to these short-term small-dollar loans than meets the eye.
Before taking out a cash advance loan, make sure answer these five questions so that you don’t end up in an even bigger financial hole than the one you started in.
Oh, and to clarify, while a cash advance is technically a kind of loan you would take out with your credit card, the term is also often used to refer to what are essentially payday loans, and those are the kind of cash advances that will be discussed in this article.
1. What’s the interest rate?
Cash advances are a type of short-term no credit check loan; in many ways, they’re basically the same thing as a payday loan. With average principal amounts of a few hundred dollars and an average repayment period of two weeks, they’re meant as nothing more than an “advance” on your next paycheck.
And yet, cash advances also come with some significant downsides: Namely, they cost way more than a traditional personal loan or even other types of bad credit loans. While any loan that you take out when you have bad credit is going to cost more than a regular loan, the high price of cash advances should give you pause.
At first glance, their interest rates won’t seem so bad; the average interest rate for a cash advance is only $15 per $100. That’s not bad at all! Except … that it is. Those short repayment terms obscure how much a cash advance will cost in comparison to other loans.
In order to determine the true cost of your cash advance, take a look at its annual percentage rate (APR). This will give a standardized measure to use when comparing costs between a loan you pay back in two weeks and an installment loan that you’d pay off over a year or more.
Here’s the truth: The APR for a two-week cash advance with a $15 per $100 interest charge is a staggering 391%! That’s a lot! And while a sky-high APR might not worry you so much when you’re planning to pay the loan back in a week or two, there’s a good chance that those interest charges will start adding up …
2. Can I afford to pay this off?
If you pay off your cash advance on the original date it’s due, the amount of money you’ll be paying towards interest is fairly reasonable; a 15% rate might be a little on the higher side for a personal loan, but if you have poor credit, that 15% is going to be totally fine.
Still, you really do need to ask yourself whether or not you can afford this loan. Instead of looking at the interest rate, look at the size of the payment.
If you were to take out a $300 cash advance with a 15% interest charge, your payment amount would be $345. Given that you need the $300 right now, is $345 really something you can afford to pay back in only a few weeks?
Research suggests otherwise. In fact, a study from the Pew Charitable Trusts found that well over 80% of payday loan borrowers didn’t have the money in their monthly budget to cover their loan payment. And if you’re counting on the lender to only lend you a loan you can afford to pay back, think again …
3. Will this lender check my ability to repay?
When a borrower takes out a cash advance loan that they can’t afford, they’re often faced with a choice between two outcomes, neither of which is good.
If they’re in a state where the practice isn’t banned, the borrower could choose to roll over their loan. This means that they make a nominal payment—usually covering just the interest owed—in order to extend the loan’s due date. That new loan term comes with a fresh interest charge, doubling the cost of their cash advance in one fell swoop.
The other choice that borrowers have in situations like these is to reborrow, whereby they pay the first loan off and then immediately turn around and take out a new one. In many ways, reborrowing is no different from rolling a loan over; borrowers are still paying extra and remaining in debt.
This can kick off a process known as a cycle of debt, wherein a person keeps throwing more and more money towards interest and other fees while never actually bringing themselves closer to being debt free. With payday loans and cash advances, this cycle can be especially fierce. The Consumer Financial Protection Bureau (CFPB) estimates that the average payday loan customer takes out 10 loans per year and spends almost 200 days in debt.
When a traditional lender checks your credit score during the application process, they are looking to see whether you can pay back the money you’re looking to borrow. But with no credit check loans and cash advances, lenders not only don’t check people’s credit scores, but many of them don’t do anything to confirm whether or not these people can afford their loans at all!
So when you’re considering a cash advance loan, take a few moments and see whether or not this lender is checking your ability to repay. If they’re not, that might be a sign that they’re actually counting on their customers having to roll over and reborrow their loans; after all, additional money paid towards fees and interest helps their bottom line.
If that’s the case, then it’s also a sign that you should take your business elsewhere.
4. Will this help my credit score?
This will be a pretty easy question to answer. When it comes to short-term no credit check loans and cash advances, you’ll be hard-pressed to find one that helps your score.
While pretty much every traditional lender and credit card company reports payment information to the credit bureaus, the practice is much rarer with non-prime lenders—especially ones offering short-term products that are paid off in a single, lump-sum balloon payment.
To put it simply: Lenders that don’t check their customers’ credit scores before lending to them often don’t feel much of a need to report the information that helps shape those scores in the first place.
5. What are other customers saying?
Finally, before you sign your name on the dotted line or click “I agree” on that online loan agreement, take some time to research a potential cash advance lender and see what other customers have to say about them.
Don’t just do a cursory Google search either. Check out their customer reviews on lending platforms and social media. Go to their BBB page and see what kinds of complaints have been lodged against them and whether they’ve been able to resolve them.
Taking out a small-dollar cash advance loan might seem like no big deal, but the risks involved are greater than you probably realize. Taking the time to answer these questions will ensure that you find the loan (and the lender) that’s right for you.
The best way to avoid short-term cash advance loans is to build up an emergency fund and improve your credit score.
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