If you need physical cash, then an online cash advance probably isn't your best option ... one of many reasons you should be wary of these short-term no credit check loans.
Wait, how exactly do cash advances work when they’re online? It’s right there in the name: cash advance. The internet is great at a lot of things, but handing over cold hard currency is not one of them.
With that in mind, here’s everything you need to know about online cash advances work, and how they differ from the store-bought kind.
What is a cash advance?
Technically, a cash advance is a kind of loan you can get through your credit card. However, many short-term, small-dollar no credit check loan are advertised as “cash advance loans.” These are the loans this article will be discussing. Let’s break it down:
- Short-term: These loans are meant to be repaid in a matter of days or weeks, not months or years. The average repayment term for a cash advance loan is only 14 days.
- Small-dollar: Typically, these loans are under $1,000—and often well under. The amount you can borrow with a cash advance will vary depending on the local laws in your state of residence.
- No credit check: Cash advance lenders almost never check a borrower’s credit score before they apply. Some don’t even verify a borrower’s income or that they have any way to repay the loan at all.
If that sounds a lot like payday loans to you, then you’re correct. Payday loans and these cash advance loans are basically the same things.
These loans are aimed at people with bad credit scores who can’t borrow from traditional lenders. They are intended as “bridge financing,” which means they help plug up financial shortfalls.
How much does a cash advance cost?
Like all loans, cash advance loans come with interest charges. But unlike traditional installment loans, which accrue interest over time, cash advances and payday loans charge interest as a single flat fee.
The charge for a specific cash advance will vary from lender to lender, and they can also be different depending on where you live—as certain states and cities permit higher interest rates than others.
Still, the average interest rate for a cash advance loan is $15 per $100. Does that sound reasonable to you? Why wouldn’t it?! 15% interest for an unsecured loan isn’t that bad.
But let’s look at it another way. Namely, let’s look at that cash advance’s annual percentage rate (APR), which is 391%. Yowza!
How do you get a cash advance online?
For many years, the best place to get a cash advance loan was at your local payday lender or check-cashing storefront. You would walk into the store, and either make out a post-dated check for the total amount due (principal plus interest) or sign an automatic debit agreement.
Once the loan agreement is signed, the storefront employee hands you your cash and you are on your way!
But many cash advance borrowers now borrow their money online. The process is mostly the same, except for the part where the cash is placed in their hand. The internet hasn’t figured that one out yet.
Instead, borrowers typically receive their funds via direct deposit. For this, they need a bank account that is capable of receiving electronic transfers. Typically, these funds will arrive within one to two business days, but some lenders offer same-day funding. Really, how quickly your loan will arrive depends on a number of factors.
For borrowers who don’t have a bank account, some lenders will also load their funds onto the borrower’s prepaid debit card. If you need actual cash and you need it now, then an online cash advance or loan probably isn’t going to work for you.
On the other hand, if all you need is funds in your bank account, online loans should work fine for you—so long as they can deposit those funds in a timely fashion.
Okay, but should you get a cash advance online?
If you’re considering taking out a cash advance online (or in the store, for that matter), you should seriously consider all your other options. Cash advances certainly are convenient, but they come with some major downsides.
As we mentioned earlier, the interest rates for cash advances tower over the rates for regular personal loans. Even if you have bad credit and you need a loan, you should be trying to shop around for the best rate—and there are many bad credit loans out there which offer lower rates than cash advances.
And while one of the perks of a payday cash advance is that you can pay it off quickly, that might be less of a feature and more of a bug. That single lump-sum payment means paying hundreds of dollars all at once, which could blow yet another hole in your budget.
In fact, according to a study from The Pew Charitable Trusts, that’s exactly what happens to a majority of payday loan borrowers. They found that well over 80% of borrowers didn’t have enough funds in their monthly budget to cover their payday loan payments.
And if you can’t afford your payments, you might find yourself with no other choice but to roll over or reborrow your cash advance, which will increase both your cost of borrowing and your total days spent in debt.
Reborrowing a cash advance is simple: You simply pay the original loan off and the immediately borrow a new one to cover your other bills and expenses.
Rolling over a cash advance is a little different. Instead of paying the loan off, you extend the loan’s due date in return for a nominal payment and a new interest charge. The first time you roll over a cash advance, your cost of borrowing effectively doubles.
These outcomes aren’t just something that happens on paper; they reflect the reality of payday loans and cash advances in America. A study from the Consumer Financial Protection Bureau (CFPB) found that the average payday loan borrower spends almost 200 days per year in debt and takes out 10 such loans annually.
Lastly, if you pay off a cash advance on time, it’s not going to help you build the kind of positive payment history that you want to be reflected in your credit score. This is because most cash advance lenders don’t report payment information the credit bureaus.
The best way to handle emergency expenses is to maintain a well-stocked emergency fund, hands down. And while taking out an online cash advance could certainly work out well for you, there is a very large chance that it ends up as more of a problem than a solution.
Another great way to avoid payday cash advances is to improve your credit score.
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