Are Payday Loans and Cash Advances the Same Thing?

Inside Subprime: Dec 5, 2018

By Grace Austin

While cash advances and payday loans are both short-term loans that charge expensive interest and additional fees, the two financial products have differences.

A payday loan is a short-term cash loan that can be acquired either through a brick-and-mortar store or online. It’s usually for a small-dollar amount.

A cash advance is also a short-term cash loan. There are two types of cash advances: a credit card cash advance just requires a PIN number to take money out of the ATM, or the credit card can be used at a bank that offers advances through the card’s network. Another type of cash advance is structured the same way as a payday loan, and is meant to be an advance on a paycheck. It can also be acquired online or through an in-person transaction at a store that offers them.

Both payday loans and cash advances have similarities — there are bank or credit card fees, as well as cash advance fees, often associated with a cash advance, and added fees are usually attached to payday loans. Both options also incur higher interest than a standard consumer credit card charge.

Both are easy to acquire, too — for payday loans, a consumer usually doesn’t need a credit check, just a bank account and legal identification. And a credit card cash advance often needs less — simply owning a credit card and being able to find an ATM will suffice. That means both kinds of cash advances and payday loans are given without the lender looking into if the borrower can repay the loan “while meeting your other financial obligations,” as the Consumer Financial Protection Bureau puts it.

And a payday loan and both types of cash advance start accruing interest immediately — meaning as soon as you take out the loan or acquire the cash from a bank, you are being charged interest on it.

But, despite these similarities, each financial product has dramatic distinctions.

A credit card cash advance might have an APR between 20 and 30 percent, since companies usually charge more for them than standard credit card APR; a payday loan or other type of cash advance could have interest going into the hundreds of percent when fees are factored in.

Repayment on a payday loan usually is required within the time one receives a payday, usually about 30 days, but often two weeks. A credit card cash advance, on the other hand, usually will appear on your next credit card statement.

Still, despite the differences, most experts do not recommend consumers taking out either type of cash advance, or a payday loan, despite the need and lure of quick cash.

But payday loans have proven to be much worse for many consumers, because the interest and fees, in states where it’s not against the law, can be exorbitantly high, leading to a cycle of debt that’s hard to come out from under.

For more information on payday loans, scams, and cash advances and title loans, check out our state financial guides including California, Illinois, Texas, Florida and more.