Cash Advance Loans: Here's 4 Things You Should Know
Cash advance loans are supposed to be an easy way to cover emergency expenses, but they could end up trapping you in a long-term cycle of debt.
When you need money and you need it fast, taking out a cash advance might seem like your best option—especially when you have lousy credit.
Well, first it’s important to understand that many loans which are advertised as “cash advance loans” are not actually cash advances. A cash advance is a loan taken out with your credit card that has rules that are different than those for standard credit card use.
However, many short-term, high interest loans are marketed as cash advance loans, and those are the loans this article will be referring to.
1. Cash advance loans are paid back quickly.
When it comes to short-term, no credit check loans, the terms “payday loan” and “cash advance loan” are often used interchangeably. Both names do a good job of describing how the loans work: They’re meant as an “advance” on your next paycheck designed to be repaid on your following payday.
That’s why the average repayment term for a payday cash advance is only 14 days. They’re meant to be a form of quick-and-easy bridge financing that lets you cover unexpected costs or paper over a pre-paycheck shortfall.
14 days (or seven days or one month) sounds kind of nice. You’re able to get the money you need and get out quick! But those short terms can come back to bite you, especially when combined with the next two items on this list.
2. Cash advance loans also have sky-high interest rates.
When you have bad credit, you are going to end up paying more for personal loans and credit cards. That’s simply unavoidable. A low credit score tells lenders that you’re not the most reliable borrower; many traditional lenders won’t lend to you at all.
But with cash advance loans, you’ll end up paying much higher rates than you will with other types of loans. Even a rate that seems very reasonable is going to be many times higher than the rates for a regular loan.
The average interest rate for a payday cash advance loan is $15 per $100. Doesn’t sound too bad, right? Well, here’s the thing: A flat 15% rate is really high for a loan that’s only two weeks long!
When you compare annual percentage rates (APRs), it quickly becomes clear just how much pricier these cash advance loans are. A regular personal loan will have an average APR anywhere between 6 and 36%; a cash advance loan with a 15% rate, on the other hand, has an APR of 391%!
3. You pay off cash advances in one lump sum.
Cash advance loans can be difficult for many borrowers to repay on time. And while high rates are certainly a factor, there’s a lot more to it than that. One of the other major factors is how these loans are designed to be repaid.
Some personal loans are structured as amortizing installment loans. With these products, you pay off the loan in small increments over time, with each payment going towards both the loan principal and the interest owed.
But short-term loans like payday loans and title loans are designed to be paid back in a single balloon payment that includes all the principal and all the interest. This is referred to as a “lump sum repayment” model, as the loan is repaid in a single lump sum.
Let’s say you take out a two-week payday loan for $300 that carries a 15% interest charge. In 14 days, on the loan’s due date, $345 will be automatically deducted from your check account. Now ask yourself: Is that a payment you would actually be able to afford?
According to a report from the Pew Research Centers, many payday loan borrowers cannot. They found that well over 80% of payday loan borrowers didn’t have the funds in their monthly budget to cover their loan payments.
Much of this difficulty is due to the lump-sum repayment model, which creates individual payments so large that borrowers struggle to afford them. This leads us to the fourth thing you should know about payday cash advances …
4. Cash advance loans can easily snare you in a debt trap.
When a borrower can’t afford to make their payment on a cash advance loan, they are usually faced with two options: rollover or reborrow.
Rolling the loan over means that the customer extends the loan’s due date in return for an additional interest charge. Oftentimes, they will only have to pay off the original interest charge in order to do so. Loan rollover is a practice banned in many states.
Reborrowing the loan simply means that the borrower pays back the original loan and then immediately takes out another. In certain states, borrowers have to wait out a mandatory “cooling off” period before they can take out another payday loan.
When a cash advance borrower rolls over or reborrows their loan, they are taking the first step in a cycle of debt. Since they can never afford to pay off their debt entirely, they are constantly racking up additional charges—essentially paying more and more each time to borrow the same amount of money.
Statistics back this up. Research from the Consumer Financial Protection Bureau (CFPB) found that the average payday loan customer took out 10 payday loans a year and spend almost 200 days in debt annually.
There are better options out there.
Creating a cash emergency fund is one of the best ways to keep cash advance loans away from you. Start by saving up $1,000 and go from there. You can also try borrowing money from friends and family members, although you’ll want to be careful and make sure that both you and the person lending you money are on the same page.
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