There are better ways to cover a financial shortfall than by taking a cash advance, but some cash advances are even riskier than that.
An unexpected budget shortfall can totally trip up your finances. Maybe it’s a surprise car repair, a sudden medical bill, or just a bunch of purchases that add up quicker than you expected. No matter what the reason, sometimes those last couple days till payday can be rough going.
One way that people who need money now can try and make up their shortfall is by getting a cash advance. While this certainly isn’t the best way to try and bridge a financial gap, sometimes it can seem like the best bad option you have.
The only problem is … the term “cash advance” is actually applied to a couple different types of financial products, some of which are far riskier and more expensive than others. So, before you take one out, make sure you ask yourself, is this the cash advance you’re looking for?
Credit card cash advances.
You standard credit card transaction is entirely cashless. You swipe the card and money is transferred automatically. But you can use your credit card to get cash if you really need it. Just a visit an ATM or a local bank branch and you can get a cash advance that leaves you with cash in hand, with the amount you charged being added to your total balance.
Still, credit card cash advances come with significant drawbacks. The first is a cash advance fee that will be charged on every transaction which can vary from as low as $2 to as much as five% of the amount withdrawn. Either way, you’re paying extra just to get this cash in your hand.
And the costs don’t end there. The second drawback of credit card cash advances is the interest rate, which will run higher than the rate you pay on a regular credit card transaction.
Third, regular credit card transactions come with a one-month grace period before interest is charged. Not so with credit card cash advances, which start accruing interest the very moment that they’re added to your balance. Not only will you be paying a higher rate, but you’ll be paying it immediately!
Lastly, most credit cards have a daily or single-transaction limit on how much cash you can withdraw. Even leaving aside that very few transactions require cash anymore, you’ll be restricted in how much money you can access via a cash advance.
In the end, a credit card cash advance just isn’t a very good way to cover unforeseen expenses. You’d be better off just putting the transaction on your card, as you’ll benefit from both the lower interest rate and the one-month grace period.
Cash advance loans.
Still, a credit card cash advance is often preferable to the other kind of cash advances out there: cash advance loans. These are short-term no credit check loans, essentially the same as a payday loan, and they cost way more than your typical personal loan.
Cash advance loans have an average repayment period of only two weeks and are paid back in a single lump sum. They work as an “advance” on the customer’s future paycheck, with the due date often being set for the borrower’s next payday.
They often carry a flat-rate interest charge in the range of 15%. While this might seem like a reasonable rate, it adds up quickly when you compare it to standard personal loans. 15% on a two-week loan translates to an annual percentage rate (APR) of almost 400%!
Additionally, those lump-sum repayment terms can make these loans more difficult for borrowers to repay. According to a study from the Pew Research Centers, over 80% of payday loan borrowers do not have the money in their monthly budget to afford their loan payments.
When borrowers cannot pay back their cash advance loan on time, some will roll over the loan, securing an extension on their due date in return for an additional interest charge. Others will simply pay the loan off and then immediately take out another to cover future bills.
When you are borrowing money to cover a budget shortfall, the last thing you want is to end up neck deep in high-interest debt. And yet, constantly rolling over and reborrowing short-term cash advance loans is how people end up trapped in a predatory debt cycle.
If you’re looking for short-term bridge financing, a cash advance loan should be at the very bottom of your list.
What are your other financing options?
The first thing you should do when facing a money shortfall is to look at your monthly budget and see where you can cut back. (If you don’t have a monthly budget, you should go ahead and create one.) For those who can cover a shortfall by trimming back in other areas of spending, that’s the best route available.
If spending less can’t entirely bridge your financial gap, you should look at earning some extra cash through a second job or side gig. You can also talk to friends and family about borrowing money from them, but you should make sure that both parties are crystal clear on the terms of the loan agreement—and even then, you’re still putting your relationship at risk.
You can also research which government programs or non-profit assistance might be available.
Once all those options have been exhausted, only then should you start try to find the best loan option available to you.
If you can’t cover the shortfall using your credit card, bad credit installment loans might be an option, especially if the lender reports payment information to the credit bureaus, which can help bolster your credit score in the long run.
To stave off future shortfalls, you should build up an emergency fund that you can tap into when times get tough.
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