If you're not careful, taking out a cash advance to bridge a short-term financial gap could leave you in a long-term financial bind.
One of the biggest selling points for cash advances is their simplicity: You borrow a couple hundred bucks, and a few weeks later you pay it back plus interest. That’s it!
Actually, no. That’s not it. If you’re not careful, that cash advance could land you in an ever deeper financial hole than the one you started in—even if you pay it off on time.
Also, to clarify, while cash advances are technically loans taken out with your credit card, many short-term, high interest lenders advertise their product as a cash advance loan. This article will be discussing the latter.
Here’s how cash advances work.
Are you familiar with payday loans? Because these cash advances and payday loans are basically the same things. They are the “flammable” and “inflammable” of the short-term lending world.
Payday cash advances are short-term, small-dollar no credit check loans that are intended to help “tide borrowers over” until the next paycheck. Well, at least that’s how they’re supposed to work. The truth is a little more complicated.
These types of bad credit loans usually come with an average loan amount of only a few hundred dollars—although the total amount you can borrow will vary depending on what state you live in. They also charge interest as a flat fee, with an average interest charge of 15%.
The enticing thing about a cash advance loan is that it lets you get out of debt quickly—but that doesn’t mean that paying one off is easy. In fact, taking out a cash advance loan could easily land you in debt for hundreds of days instead of a mere dozen.
1. Plan ahead.
Unlike installment loans, which are paid off in a series of regular payments over time, cash advance loans are repaid in a single lump sum, often only a few weeks after the loan is issued. Payment is usually made via a post-dated check or an automatic debit agreement.
Given all this, it might seem like repayment is something you don’t have to worry about. But that’s not the case. If you don’t plan ahead, that payment could end up landing you in a predatory cycle of debt. (More on that later.)
Your payment for this cash advance loan shouldn’t be a “set it and forget it” kind of thing. Look at your monthly budget and make sure that you not only have the money in your account to cover the payment but that you’ll also have enough money in your account afterward to cover the rest of your bills.
If you’ve already taken out the loan but find that your payment will blow yet another hole in your budget, then see where you can cut back in order to patch it up. The more on top of your finances you are—even when dealing with a small-dollar cash advance loan—the less likely you are to get burned.
2. Save money.
When you take out a cash advance, the due date is probably going to be set for your next payday. So you don’t have to worry, right? Those funds will just come out of your next paycheck and you’ll be good to go.
Not so fast. It’s all too easy for this mindset to lead you down a dangerous path that ends in the jaws of a predatory debt trap. With those lump sum repayments that withdraw hundreds of dollars from your account at once, you might find yourself facing another budget shortfall sooner rather than later.
So instead, save whatever money you can in advance of your loan’s due date. The more money you can save, the bigger the financial cushion you’ll have once those funds are withdrawn from your account. That way, you won’t need to take out a second cash advance loan to cover paying off your first one.
3. Don’t pay late—or early.
With any loan, making your payment on-time is a good rule to follow. Late payments mean extra fees and charges; and with many loans, it could end up negatively impacting your credit score.
Even though most cash advance lenders don’t report payment information—meaning your score won’t be affected—an extra charge on top of the interest you already owe is the last thing you need.
But here’s where cash advances are a little different: Paying them off early won’t save you any money either.
With standard personal loans and credit cards, interest is accrued slowly over time. The longer the loan or card is outstanding, the more interest the borrower owes; and the earlier that the borrower can pay it off, the more money they’ll save overall.
Not so with cash advance loans. Since they charge interest as a flat fee, the amount you owe will be the same on the day the loan is issued as it will be on the day the loan is due. This means that paying off your cash advance loan ahead of schedule carries few financial benefits—if any.
4. Don’t roll it over.
One of the main reasons steps one and two on this list are important is because they’ll help you out with this step. Rolling over a cash advance loan is one of the best ways possible to end up trapped in an ongoing cycle of debt.
Rolling over a cash advance is pretty simple: You have to pay a portion of what you owe—oftentimes just the interest that’s due—and in return, you get a brand new loan term. Instead of paying off the loan now, you can pay it off two weeks from now!
But here’s the problem: That new loan term doesn’t just mean a new due date, it also means a new interest charge. This effectively doubles the cost of your loan in a single sitting. If you were paying $45 to borrow a $300 online loan, now you’re paying $90, without actually borrowing any additional money.
As you might be able to tell, the interest rates for cash advance loans seem reasonable at first. But they add up fast. In fact, the annual percentage rate (APR) for a two-week cash advance with a 15% interest charge is a staggering 391%!
If you get into the habit of rolling over your cash advance loans, you’re basically throwing money away. What’s worse, those regular payments you’re making to extend the due date are making it harder and harder to save up the money you need to pay the loan off altogether!
That’s how a cycle of debt works. And it should come as no surprise that loan rollover is actually banned in many states for exactly this reason.
5. Build an emergency fund.
Okay, this one is cheating slightly. Building up a well-stocked emergency fund won’t help you pay off a cash advance, but it will help you escape the need for any additional cash advances in the future.
Unlike money that you have saved for retirement, an emergency fund is there to help you during, well, emergencies! It’s often kept in cash somewhere that you can easily access it.
While many experts recommend having an emergency fund big enough to cover six month’s worth of expenses, that’s probably a long way down the line. If you’re just starting your first emergency fund, aim for $1,000. That should help cover many surprise bills or budget shortfalls you might encounter. Goodbye cash advance, hello financial stability!
Think about your emergency fund like it’s your own personal lender. You get the money you need when times are tough, then you pay the money back when times are good. The best part: You don’t have to pay any interest at all!
Subscribe to our newsletter for more marketing news & industry trends
The information contained herein is provided for free and is to be used for educational and informational purposes only. We are not a credit repair organization as defined under federal or state law and we do not provide "credit repair" services or advice or assistance regarding "rebuilding" or "improving" your credit. Articles provided in connection with this blog are general in nature, provided for informational purposes only and are not a substitute for individualized professional advice. We make no representation that we will improve or attempt to improve your credit record, history, or rating through the use of the resources provided through the OppLoans blog.