Here’s Why Some Cash Advances Are Much Riskier Than Others
The name “cash advance” can be used to describe two very different kinds of financial products, one of which is way more expensive and should totally be avoided.
Life is expensive, especially if you don’t have a lot of money. Simply getting from one month to the next can require a financial balancing act that makes you feel like that French guy from Man on Wire. And for the six out of every 10 Americans who have less than $500 in savings, an unexpected expense could send their finances into freefall.
Folks who find themselves in this situation are usually left with only a few options, none of them great. This is doubly true for those who have lousy credit scores. They’ll usually be left choosing between any number of bad credit loans like payday loans, title loans, or cash advances. (They should be checking out bad credit installment loans, but that’s a topic for another day.)
We’ve written about the dangers of payday loans and title loans in the past, but for this post, we want to focus on cash advances. Why is that? Well, because the term cash advance is, frankly, a pretty vague one. It can apply to totally different products, some of which are far more financially treacherous than others. If you’re in a money bind, it will help to know which you should consider and which you should avoid.
Cash advance loans are basically just payday loans.
You’ve likely seen ads for cash advance loans outside your local check-cashing storefront or on any number of annoying banner ads on social media apps and other websites. But here’s the secret about cash advance loans: They’re really just payday loans.
Cash advance loans get their name from the fact they act as an advance on your next paycheck, just like how payday loans get their name from the fact that they get repaid on your next payday. It’s two names for the same extremely flawed product.
They work like this: You take out a small-dollar personal loan, usually a couple hundred dollars, for a short period of time, oftentimes two weeks or less, and you get charged a flat interest fee. When the loan is due, the lender will either cash a post-dated check or automatically debit your bank account for the amount owed.
While that might not seem so bad, there are a lot of problems hidden right beneath the surface. A typical cash advance loan might be $300 with a 15 percent interest charge to be repaid in two weeks. Do you know what the annual percentage rate (APR) for that loan is? It’s 391 percent!
Then again, who cares about the annual rate if you’re going to be paying back the loan within two weeks? It’s only that 15 percent rate that matters, right?! Wrong. According to the Consumer Financial Protection Bureau (CFPB), the average payday loan customer takes out 10 loans a year, adding up to 200 days spent in debt annually.
What’s more, those short terms often end up being more of a burden than a relief. The Pew Charitable Trusts has found that 86 percent of payday loan borrowers don’t have the money to pay back their loans on time. This is how people end up stuck in a predatory cycle of debt.
So if you’re thinking of avoiding a predatory payday loan by taking out a cash advance, you’re in for a rude awakening. These two types of loans are one and the same. No matter which you end up choosing, you’re getting a raw deal.
Credit card cash advances are good for cash-only expenses.
If you’ve ever needed cash for a certain transaction, you might have had to take out a cash advance on your credit card. Hopefully, you did this over taking out a cash advance loan, as credit card cash advances—while far from perfect—are far preferable to high interest no credit check loans.
Whenever you make a purchase on your credit card, the amount that you pay is added to your revolving balance. You can then either pay off the entire balance—which we highly recommend—or you can pay only the minimum amount due. If you pay off a transaction within 30 days of making it, you’ll fall within the card’s grace period and escape interest charges entirely!
With credit card cash advances, things are a little different. The amount that you pay will still be added to your balance, but you’ll also (in most cases) have a cash advance fee added on top of it. Additionally, you won’t have any interest-free grace period on those advanced funds. Interest will start accruing immediately—and at a higher rate than a normal transaction.
Lastly, you’ll have to contend with limits. This will vary depending on your credit card company and/or product, but most cards come with limits to how much you can withdraw in a single transaction or even a single day.
While credit card cash advances come with much lower APRs than cash advance loans, the fact remains that their usefulness is pretty limited. Unless it’s a transaction where you absolutely need cash, you’d be much better off just putting the transaction on your credit card. Accruing credit card debt isn’t great, but it’s better than either of your cash advance alternatives.
Want to get a head start on handling surprise expenses like a medical bill or car repair? Check out these related posts and articles from OppLoans:
- Want to Avoid No Credit Check Loans? Build an Emergency Fund
- How to Finance a Medical Emergency: An OppLoans eBook
- Your Guide to Escaping a Debt Trap
- 8 Ways To Save Money Today, Tomorrow and Every Day After
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