The APRs for credit card cash advances are high, but the APRs for payday cash advance loans are so much higher.
If you have a credit card and need some quick cash, you might wonder if a cash advance is a good solution. And it might be!
Cash advances allow you to take out money from an ATM through your credit card just like you would with a debit card. However, this isn’t money that you already have in your checking or savings account, it’s money that you are borrowing and adding to your credit card balance.
Since you’re borrowing money when you take out a credit card cash advance, the whole thing is really just another type of loan. And when taking out a loan, you’ll have to figure out the interest and fees that you’ll be paying back on top of that amount you borrowed.
Basically, this means figuring out how much your cash advance is going to cost you. Do you know how much a cash advance on your credit card would cost? If you’re faced with an emergency expense, knowing this info ahead of time will help you make the right financial decision.
First step, figure out the APR.
Aside from payment dates, one of the most important aspects of a loan is its APR. “APR” stands for annual percentage rate, and it’s a number that allows you to make an “apples-to-apples” comparison between different types loans and credit cards. It measures how much a loan will cost over the course of a full year.
With credit card APRs, specifically, it’s wise to account for how long a given balance will be outstanding. If a $1,000 balance with a 20% APR is outstanding for a full year, it will cost you $200 in interest. However, if you pay that $1,000 balance off immediately, you will pay much less. And with regular credit card transactions, you might not pay any interest at all—but more on that in the next section.
When it comes to credit card cash advances, however, APR might actually not account for the full cost of the loan. While APR for loans and credit cards take into account origination charges and annual fees, they do not account for the additional fees you’ll pay on a cash advance. In order to account for the true cost of your cash advance, you’ll need to take both into account.
So how do the APRs on cash advances look?
Credit card cash advances have much higher APRs than regular purchases.
According to this 2017 article in the New York Times, the average APR for a credit card cash advance is 23.68%. To give that number some context, it’s almost 8% higher than the average interest rate for standard credit card transactions.
And remember, that APR doesn’t take into account the fee you’ll have to pay in order to take out your cash advance. According to that same report, the average cash advance fee is $10 or 5% of the amount withdrawn, whichever is higher. If you added 5% onto that standard APR, you’d get a true cost of almost 30%!
With credit card cash advances, there are no grace periods.
Remember when we mentioned that you could avoid paying any interest on credit card purchases? That’s because they come with 30-day grace period between when the purchase is made and when interest starts accruing on that balance.
So if you pay your credit card bill in full before that grace period is up, you won’t have to pay any interest beyond the price of what you actually purchased. It’s why, whenever possible, you should pay off your entire credit card bill every month instead of just making the minimum payment. Trust us, your credit score will thank you.
However, credit card cash advances do not have a grace period, so that higher interest rate will start accumulating as soon as you get your cash. While it’s impossible to get a credit card cash advance for free, you’ll still want to pay it off as soon as possible in order to minimize the total cost.
The average APR for a payday cash advance is over 300%.
So that covers the kind of cash advance you can get with your credit card, but what about the other type of cash advance loans? The kinds you may have seen ads for online or in storefronts? Well, whether you get one of these as an online loan or as cash from your local currency exchange, these are a type of bad credit loan. Basically, they’re payday loans—they give you an “advance” on your next paycheck—which means that the kinds of rates you’ll be dealing with are much higher.
For example, some payday lenders will advertise themselves as offering cash advance loans. But unlike the APRs in the 20-30% range that you’d see with a credit card cash advance, these payday loans have average APRs above 300%! That’s 10 times the cost!
It can be very hard to pay off a payday cash advance on time.
The payment terms for payday cash advances also tend to be very short, usually around two weeks. If you can’t pay back the loan with all of its fees and interest in that time, you might have no choice but to roll the loan over—paying extra money to extend the due date—or take out a new loan immediately after you pay the old one off.
Rolling over or reborrowing these cash advance loans can quickly lead you into a cycle of debt, where you are always extending the loan without ever getting out from under it. This will be bad for your credit score and your finances in general. And unlike with credit cards, payday loans are “no credit check loans,” which means they won’t report your payments to the major credit bureaus. Even if you do pay off the loan in time, you won’t get proper credit for it. Literally.
The APR on a credit card cash advance is likely to be higher than the rate for a traditional personal loan from a bank, but you may not qualify for a traditional bank loan depending what your credit score looks like. Taking out an advance on your card can be a reasonable option, though you’ll want to try to pay it back as quickly as possible to minimize the interest you’ll pay. One thing we can say for almost sure: the rates for credit card cash advances are way better than the rates for payday cash advance loans.
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