Cash Advance

Cash Advance

A cash advance is a short-term loan provided through your credit card company. Cash advances come with much higher interest rates than normal credit card transactions.

What is a Cash Advance?

A cash advance is a short-term loan you can take out with your credit card. You use your available credit to borrow cash that you repay with interest and fees. The amount you can borrow is called your “cash credit line,” and it varies depending on your credit history. If you take out a cash advance, expect to pay at least 20 percent in interest plus additional fees.¹

You might have also seen the term “cash advance” used by storefront and online lenders. In addition to being a type of loan that you can get through your credit card company, a “cash advance” is also a common name for payday loans. However, a payday loan that’s called a “cash advance” is very different from a cash advance that a credit card company offers.

How does a Cash Advance work?

With a cash advance, you use your credit card to take out a cash loan. You do this by visiting a bank or using an ATM. (Most credit card companies offer cash advances through any bank or ATM.) You withdraw cash and the amount is charged to your credit card.

Your credit card statement will show the cash advance in much the same way that it would if you had bought something. (If you got a $200 cash advance, the statement will show a $200 charge, just as if you had made a purchase.) You’re responsible for paying back the cash advance plus fees and interest.

Unlike using your credit card for a purchase, with a cash advance you won’t get a grace period in which you don’t have to pay interest. Cash advances are also very different than using your debit card to withdraw money from your account. (With a debit card, you’re withdrawing money you have, while a cash advance is loan.) You can continue to take out cash advances until you hit the limit of your cash credit line.

Why are Cash Advances so expensive?

Cash advances are much more expensive than simply making a charge on your credit card. When you buy something, you usually don’t owe interest if you pay your full balance each billing cycle. With a cash advance, you immediately owe interest. A 2015 survey of 100 cards found that 86 percent of them charge an APR above 20 percent, and one card charged a full 36 percent.²

Cash advances also come with fees. They vary from card to card, but usually they’re somewhere in the neighborhood of two to five percent of the amount you withdraw.²

Are Cash Advances bad?

Cash advances are one type of loan among many. They might make sense if you need to pay for something in cash but don’t have the funds to do so. However, you should only get a cash advance if you absolutely have to.

The problem with cash advances is that they’re pricey—they come with fees and high-interest rates. If you have other options, you should pursue them instead of taking out a cash advance. Consider borrowing money from a friend or relative, or taking out a low-interest loan, or paying for something with a credit card instead.

The other question to ask when looking into a cash advance is what you’re using it for. Cash advances give you a quick influx of money, but they come at a cost and you have to pay them back. So think twice if you’re planning on using a cash advance for something that you can’t afford and isn’t a necessity.

How long does interest last with a Cash Advance?

Interest on a cash advance begins to accumulate on the first day you receive the loan.³ It lasts until all the money you borrower is paid back.

Also, your credit card company will first put your payments toward lower interest balances (like charges you made on your card), and your cash advance, which has a higher interest rate, second.⁴ This means you’ll need to pay off your entire credit card balance before you can even begin to make payments toward your cash advance.

Bottom Line

Cash advances are an expensive type of loan that you should always avoid if possible.

References:

1. Kossman, Sienna. (2015, June 2). 2015 cash advance survey: convenient cash will cost you plenty. Retrieved from http://www.creditcards.com/credit-card-news/cash-advance-survey.php
2. Martin, Allison. (2013, October 10). 4 dangers of credit card cash advances. Retrieved from https://blog.credit.com/2013/10/4-dangers-of-credit-card-cash-advances/
3. Investopedia. (2014, November 14). How does interest work on a cash advance from my credit card? Retrieved from http://www.investopedia.com/ask/answers/111414/how-does-interest-work-cash-advance-my-credit-card.asp
4. Irby, LaToya. (2016, November 1). What’s a credit card cash advance? Retrieved from https://www.thebalance.com/what-s-a-credit-card-cash-advance-960691