Let's review the basics of cash advances, how they work, and the costs associated with using one.
A cash advance is a short-term loan issued through your credit card company. These loans allow consumers to use available credit to borrow cash. Borrowers repay the loan with interest and fees.
A cash advance takes money from your remaining credit card limit. Your credit card company will determine the limit for a cash advance, which will be a portion of your credit card limit. Any credit card user with an available cash credit line on a card can take out a cash advance until they hit their limit.
Credit card users who take out cash advances may use them to pay their debts, including credit card debt on a different card.
How does a cash advance work?
When you take out a cash advance, the credit card company doesn’t check or verify your credit score, as the money you borrow is coming from your credit card account. Credit card users withdraw the amount of cash they need, and the amount is charged to their credit card limit.
Cash advances work similarly to installment loans, as they give you a lump sum of money, but they’re not the same. They don’t have a set end date or a particular monthly payment. Cash advances have more flexible repayment terms, as they can be repaid at the borrower’s preference.
The cost of a cash advance (terms and fees)
Cash advances are associated with two expenses: upfront fees and interest. Annual Percentage Rates (APRs) for cash advances are higher than regular purchases on your credit card. Interest starts accruing as soon as you take out the loan and continues until you pay it back.
Cash advances do not come with the same interest-free grace period as regular credit card transactions. Interest starts accruing immediately on cash advance transactions, while the terms of the credit card will determine when interest will start to accrue on those purchases.
Every credit card company charges a different APR. According to a 2020 analysis from CreditCards.com, the average cash advance APR is 24.8%. The cardholder agreement you signed with your credit card issuer should detail the specific costs associated with a cash advance.
Along with interest, cash advances also have transaction fees attached to them. In 2018 the average cash advance fee was 5.3% of the loan, according to the Consumer Financial Protection Bureau’s 2019 Consumer Credit Card Market Report. The Bureau also reported those with lower credit scores paid more in cash advance fees.
The fee may also be a set dollar amount, usually between $5-$10.
Are cash advances safe?
Cash advances don’t require collateral like auto title loans. Your assets won’t be repossessed if you default on the loan.
Cash advances may be pricier compared to other alternative loan options. Interest starts accruing immediately after you take out a cash advance. It’s best to be prepared with a strategy to pay back a cash advance quickly to not accumulate lots of interest. The sooner you pay back your cash advance, the less interest will pile on and the less you’ll have to pay.
If you already have credit card debt, cash advances can worsen your financial situation by adding to your debt. Any money you pay your credit card company will first go towards paying down your credit card balance, not the cash advance balance. You’ll need to pay off the entire credit card balance first before you can start making payments on the cash advance loan.
Are cash advances bad?
Cash advances are a type of loan commonly used by people with liquidity problems. They often come with fees and high-interest rates. Cash advances can give you money relatively quickly, but they come with a cost.
Cash advances have the potential to negatively impact your credit score, depending on how much you borrow. When you take out a cash advance, you’re increasing your credit utilization by adding more to your credit card balance.
The Fair Isaac Corporation, which determines your FICO score, suggests your credit utilization should be 30% of your credit card limit. For example, if you have a monthly credit card limit of $2,000, you should only have a $600 balance.
Is a cash advance the same as a payday loan?
It’s common for payday lenders to use the term “cash advance” when referring to their loans. A credit card cash advance and a cash advance issued by a payday lender are two different types of loans. Payday loans generally range from $50-$1,000 and have triple-digit interest rates. The loan terms for a payday loan are much shorter than a cash advance, as they need to be paid back by your next payday.
How are cash advances different than credit card transactions?
Cash advances are not the same as credit card transactions, even though you use a credit card to take out a cash advance.
Cash advances are more expensive than regular charges on your credit card. They come with higher interest rates than normal transactions.
When you use your credit card to make a purchase, there’s a grace period in which you don’t have to pay interest. Cash advances do not come with a 30-day interest-free period. Interest charges start accruing immediately on the cash advance.
Cash advances also don’t earn you points or rewards, a perk that many credit cards offer when you make a purchase.
Additionally, using your credit card to withdraw money is not the same as using your debit card to withdraw cash. When you withdraw cash with a debit card, it’s money that already belongs to you, while a cash advance is not money coming from your bank account.
Where can you get a cash advance?
Consumers have several different options available to take out a cash advance:
In person at your financial institution
Your bank or credit union can give you the funds for a cash advance.
If you use an ATM for a cash advance, you’ll need to set up a PIN with your credit card company beforehand. Insert your credit card into the ATM machine and select the amount of money you wish to withdraw, up to your credit limit. You may be subject to ATM fees, too.
Fill out a convenience check as you would a normal check, and then cash or deposit it at your financial institution.
6 alternatives to a cash advance
A cash advance is one way to receive short-term financial relief if you have limited choices. It’s best to research different lending options to determine which is best for your financial situation. Every loan has its pros and cons. Here are six alternatives:
No. 1: Personal installment loans
If you need cash quickly, some personal loans can be funded within one business day. Depending on your credit score, the APR on a personal loan could be lower than a cash advance. Personal loans are available from online lenders, banks, credit unions, and other financial institutions.
No. 2: Borrowing money from family or friend
For some people, it can be difficult to have transparent conversations about money, but if you’re in a tight spot, asking a family member or friend for money could be an option. To maintain the relationship, it’s best to commit to paying back this person in a mutually agreed upon time period.
No. 3: Credit cards
If you have an emergency expense, you may be able to charge it to your credit card instead of receiving a cash advance. Check your available credit limit to see if you’re able to pay with a credit card. You’ll avoid the higher interest rates and fees that come with a cash advance.
No. 4: Credit union payday alternative loans
It’s required that you be a member of a federal credit union in order to receive a credit union payday alternative loan. These loans can be paid off in monthly installments and have an interest cap of 28%.
No. 5: Car title loans
Car title loans use your car, truck, or motorcycle as collateral for a short-term loan, usually for 30 days. You’ll also pay a fee to initiate the loan. If you default on the loan, the lender can repossess your vehicle or the loan can roll over; however, if you roll over a loan, it will probably be subject to additional interest and fees.
No. 6: Payday loans
Payday loans are short-term loans meant to be paid off by your next pay period. Interest rates for payday loans can be as high as 400%. These loans can be quite expensive, especially if you roll over the loan.
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