4 Reasons to Avoid Cash Advances

4-reasons-cash-advances

Cash advance. The name sure makes it sound like a good thing. Who doesn’t like cash? And “advance” means that cash is on the way right now! Sure sounds like they’re a great deal, right? Well actually, not so much…

In fact, a cash advance is just a short-term loan that comes with some unexpected—and pricey—strings attached. So when is a cash advance a good idea? Well, for most borrowers, the answer is almost never.

What is a Cash Advance?

The term “cash advance” is sometimes used to refer to payday loans. If you see a “cash advance” advertised at a storefront lender, watch out! A real cash advance is a service offered through your credit card company. Anything else that’s called a “cash advance” is probably a payday loan in disguise.

With a real cash advance, you use your credit card to take out a cash loan. This can be done at an ATM or a bank, and the money is charged to the credit card balance rather than taken out of your bank account. So if you borrow $100, your credit card will show a $100 charge—plus a fee for the withdrawal.

Most credit card companies don’t allow cash advances for the entirety of a borrower’s line of credit. For most people, cash advances are capped at a few hundred dollars.[1]

Why should I avoid a Cash Advance?

  1. Charging a purchase is better. You need a credit card to get a cash advance, and if you have a credit card, you’ll fare much better charging a purchase than taking out a cash advance to pay for it. So why opt for a cash advance? Good question. With “cash only” businesses quickly becoming a thing of the past, there is rarely any reason to.
  2. They come with high APRs. For credit cards, a purchase comes with an average APR of 15 percent. But with cash advances, a 2015 survey found that 86 percent of them charge an APR above 20 percent.[2] Among the 100 cards surveyed by CreditCards.com, the highest rates were:
    Credit CardsCash Advance APR
    First Premier Bank credit card36 percent
    BP Visa and Texaco Visa29.99 percent
    ExxonMobil SmartCard29.95 percent
    Shell Platinum MasterCard27.99 percent
  3. You’re immediately charged interest. With credit cards, interest typically isn’t assessed if the bill is paid off within a grace period—usually 30 days. But with a cash advance, interest is tacked on immediately, and a borrower isn’t free from it until the advance—and the interest—is fully paid.
  4. Costly Fees. Another strike against cash advances is that, unlike a charge on a credit card, users are hit with a transaction fee—typically five percent of the amount borrowed.[2]

When should I consider a Cash Advance?

Cash advances are rarely a good idea. They might make sense in an emergency where cash is the only accepted form of payment—say if your car breaks down and the mechanic won’t take anything else. But these situations are rare.

For some borrowers, cash advances are used as an alternative to forms of predatory lending like payday loans and title loans. Some financial analysts view them as “the better of multiple evils,”[2] but the debate about whether they’re better or worse than payday loans is ongoing. The Consumer Federation of America, however, notes that they are less expensive.

Bottom line

Cash advances are expensive and often unnecessary. They should be avoided except in rare circumstances.

References:

  1. Smith, Sandy. “Finance 101: Basics of Cash Advance and Payday Loans” YesIAmCheap.com. January 14, 2011. Accessed on October 10, 2016, at http://yesiamcheap.com/basics-of-cash-advance-and-payday-loans/.
  2. Kossman, Sienna. “2015 Cash Advance Survey: Convenient Cash Will Cost You Plenty.” CreditCards.com. Accessed on October 11, 2016, at http://www.creditcards.com/credit-card-news/cash-advance-survey.php.

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